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Money managment No.1

Discussion in 'Forex Trading Systems and Strategies' started by Bastian Rubben, Jun 23, 2011.

  1. Bastian Rubben

    Bastian Rubben SunbirdFx Representative

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    Knowing how to manage your money makes the difference between a professional trader to an amateur. Money management skills are necessary for all kind of traders, whether the trader is using technical analysis, fundamental analysis, core trading etc. The ability to understand the meaning of opening a position with high leverage can prevent a great lost.

    The most important question that every trader should ask himself is "what is the biggest loss I can afford per trade/day?". There is no absolute answer for that question, but it shouldn't be more than 3-5 percent of the account's balance. By limiting the max loss, you ensure that your account will survive longer in the market.

    If you found the maximum loss you can take, it would be easy to determine the leverage level you should use. Every time you go in to the market, you have to estimate the potential loss (in pips) in case that the trade does not work. Then, you simply divide the maximum loss you can take with the potential loss of the specific trade. The result would be the size you should use in that specific trade.

    For example, lets assume that your account's balance is 10,000$. You found an excellent trade in the EUR/USD and you had estimated that the stop-loss order should be set 100 pips below the entry point. Likewise, you decide that the max loss per trade that you are willing to take is 300$. Dividing 300 with 100 pips will result that the max size you should use for this trade is 30,000, and since your balance is 10,000, you would have to use a leverage of 1:3. The calculation is obviously different if I am holding several positions at the same time.

    The conclusion of the above is that you need to let the chart "tell" you what is the potential loss that might occur in a trade, and match the leverage and volume to the limitations you set.

    Good luck!
    Bastian Rubben
    Chief Analyst, Sunbirdfx
     
    #1 Bastian Rubben, Jun 23, 2011
    Last edited: Jun 23, 2011

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