Money Management Lesson For New Forex Traders

Ahmed Fouad Mohamed

How to Apply Money Management

I believe the best way to learn new things is by practicing and examples. Let us assume that you have a capital of $1,000 (One thousand U.S. dollars) in your forex trading account. You need to set certain rules and apply them to your trading, those rules are:

Size Per Trade

You must put a rule for yourself, for your lifetime trading which is size per trade. How? You need to ask yourself, how many U.S. dollars you are going to use per trade? and how many trades can be left open at a single time? Enough questions, let me answer you.

A $100 trade would possibly have a $1 pip value, trading with leverage of 100:1. So never trade more than 10% of your entire forex account at a time. I am serious about this, all your open trades combined should not exceed 10% of your account. So in our case, you can trade a maximum of $100 from your $1000 at the same time (All Your Trades Combined).

But be careful, if you have a bigger leverage (more than 100:1) with your broker, you need to take down the trade value. Try to keep the total pip value for all trades near $1 or less for a $1,000 account. This step is very serious and trust me it is going to help you in your new forex journey.

Risk Per Trade

This step is mandatory. You must know how much loss or gain you are going to accept. Otherwise, your trade could just loss forever, until all your money is gone! So do not do this mistake, it is very very common. Planning is key to success, plan everything before you start. Oh, show me example please. OK!

Let us say I have $1000, and I bought (longed) Euro/Dollar at 1.5000 rate, the trade is worth $100, and the pip is worth $1. I decided to take a Gain:Loss ratio of 1.5:1. So If I put my stoploss at 1.4950, my TakeProfit would be at 1.5075. Risk (What I can afford to loss) is 50 pips or $50. (5% of your account which is an average for many trades. Some traders even risk 2% only though.) Gain is 75 pips (1.5 X 50) or $75.

Basically that above example shows you how to apply money management rules to your stoploss and takeprofit levels. But now I have some important and real important notes for you.

Important Notes

A. You must plan your trade, put your take profit and your stop loss.
B. The above example risks 5% of your account per trade. But many trades risk only 2% per trade. Just do not over risk your capital.
C. Leverage heavily modify money management parameters. I highly recommend avoiding any broker with a leverage higher than 100:1.
D. The Gain:Loss ratio will be different from a trader to another. In plain words, it is the ratio which controls how much you are willing to risk, to make a certain gain. Your gain ratio should exceed your loss ratio but to be honest it depends on your technique and which system you are using. I will talk about that in later articles.

A Word for New Traders
If you have a technique with 50% accuracy. Yes, only 50% accuracy and a Gain/Loss ratio of 2:1. That means you are making profits on the long run. In theory, things are simple but to do this practical, you need to be a restrict person about your trading experience. Some people have no discipline at all and you can't blame me for that.

Okay good. Now what we've learnt together in this article?

1. Never risk more than 10% of your account per all open trades.
2. Plan your trade, stoploss, and take profit levels.
3. Never! Never risk more than 2-5% of your account per all open trades.
4. According to your system, your gain ratio should well exceed your loss ratio.

This article is dedicated for new forex traders. I am going to show you how to control your forex capital using simple money management tips. I can't say it more enough, money management plays a key role in your success or failure with your forex trading. This is not just words, a bad money management can easily ruin your forex capital.