I recently spoke with a one of clients of my forex signal service.  He was very upset that one of our trades had turned against him to the tune of nearly 300 pips.  This trade was part of an Opening Range Breakout method that is placed on the weekly time frame.  large losses and draw downs are to be expected.  When I asked him how much he was risking on the trade, he explained that he was risking 10% of his equity on this trade.  Trading doesn’t have to be all that stressful.  What we’re talking about here is three cents of movement!  When is the last time you even bent over to pick up three pennies?  How about three buttons?  Three beans?  Of course, he chose to risk quite a bit more.  Much more than he can relax with.

Here is an example of the power of proper money management:

Initial Account Value:  $1,000.00

Risk:  2%

Trade 1:  200 pip SL
Trade 2:  150 pip SL
Trade 3:  20 pip SL

Trade 1 risk = $20.00
20 / 200 = .10
Trade 1 stops out:  <20.00>
New account balance = $980.00

Trade 2 risk =  $19.60 ($980.00 * .02)
19.60 / 150 = .13 <–round down to .10.  Never round up!
Trade 2 stops out:  <15.0>
New account balance = $965.00

Trade 3 risk = $19.36
19.36 / 20 = .97 <–round down to .90.  NEVER round up!  DON’T DO IT!
Trade 3 takes profit +48
new account balance = $1,008.20

Pip balance: -302
Equity change: +$8.02

Wow.  A 302 pip loss with a positive financial outcome.  This is the real power of money management.  When you allow your stop loss value to determine the amount of money you leverage instead of the amount of money you lose, you enable huge gains on small stop trades, and maintain a controlled amount of loss.  Let’s say that you can sleep with about $20.00 of risk per trade?  Figure out the percentage of your total account value and trade down to the sleeping level.  This is how you trade emotion free, my friends.

I have an advanced money management system.  It’s much more powerful than “trade 2%.”  Trading % is better than nothing, but it is not a money management system.  I have an MBA and several years in strategic planning and  consulting for the banking industry.  If you’d like to know more about professional “banker” money management systems, email me at support@mmedge.com and I’ll be happy to speak with you.

Thanks for reading!

Tim

Filed under: The Inside Bar

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