Money Management is a critical point shows a difference between winners and losers. It was proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year.

 

In spite of the 60% winning odds 95% of traders will lose because of their poor money management. Money management is the most significant part of any trading system. Most of traders don't understand how important it is.
It's important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk you are going to accept for this trade.

 

There are different money management strategies. They all aim at preserving your balance from high risk exposure.
First of all, you should understand the following term Core equity :

Core Equity = Starting Balance - Amount in open positions

If you have a balance of $100,000 and you enter a trade with $10,000 then your core equity is $90,000. If you enter another $10,000 trade, your core equity will be $80,000
It's important to understand what's meant by core equity since your money management will depend on this equity.
I will explain here one model of money management that has proved high annual return and limited risk. The standard account that we will be discussing is $100,000 account with 20:1 Leverage . But, you can adapt this strategy to fit smaller or bigger trading accounts.

MONEY MANAGEMENT STRATEGY

Your risk per a trade should never exceed 3% per trade. It's better to adjust your risk to 1% or 2%
I prefer a risk of 1% but if you are confident in your trading system then you can lever your risk up to 3%
1% risk of a $100,000 account = $1,000
You should adjust your stop loss, so you won’t lose more than $1,000 per a single trade.
If you are short term trader, place your stop loss 50 pips below/above your entry point .
50 pips = $1,000 or 1 pips = $20
The size of your trade should be adjusted so that you risk $20/pip. With 20:1 leverage, your trade size will be $200,000.
If your stop loss was hit, you will lose $1,000 which is 1% of your balance.
This trade will require 10,000$ = 10% of your balance.
If you are a long term trader and you place your stop loss 200 pips below/above your entry point.
200 pips = $1,000 or 1 pip = $5
The size of your trade should be adjusted so that you risk $5/pip. With 20:1 leverage, your trade size will be $50,000
If the trade is stopped, you will lose $1,000 which is 1% of your balance.
This trade will require $2,500 = 2.5% of your balance.
This is just an example. Your trading balance and leverage provided by your broker may differ from this formula. The most important is to stick to the 1% risk rule. Never risk too much in one trade. It's a fatal mistake when a trader lose 2 or 3 trades in a row, then he will be confident that his next trade will be winning and he may add more money to this trade. That’s how you can blow up your account in a short time! A disciplined trader should never let his emotions and greed control his decisions.*

 

 

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