Forex Money Management in 3 Easy Steps

By Albert Schmidt

It is interesting to see how many traders are hunting for a great trading system but forget to implement a proper money management. I was amazed when I saw how a professional trader was making profit in a long run with a system I was failing to implement profitably. The key to his success was money management. It requires a discipline to stick to your money management rules. I would like to discuss some aspects of money management in Forex.

1. First rule of trading: always use stop-loss.

This is trading rule not as much as money management rule but you always need to use stop loss or otherwise you will lose a lot of money. But you need to use it wisely. First you need to backtest your system and find out what is the win-to-lose ratio of your system. Once you know it adjust your stops accordingly and do the backtesting again.

2. Find out mathematical expectation of the system.

Now it's time to find out mathematical expectation of your system. If it is positive you can trade it on your live account. If it's negative you may want to adjust the parameters of your system or change the system completely. Remember positive expectation does not guarantee the gains in the future but negative expectation will surely make you to lose money if you were to implement it on your account.

3. Calculate your risk.

Now once you know your stop-loss level for each trade and you know that expectation is positive it is time to calculate your risk per trade. Never risk more than 5% of your account per trade. If you have a big account it's better if you keep the risk as low as 1%. So how do you calculate your risk per trade? It's very simple. Let's say you are trading a system that has 50 pips stop loss. And you are trading an account of $10,000. Let's find out the size of your position for 1% risk of the account.

1% out of 10,000 is $100. So if a trade stopped out you want to lose no more than $100. Since your stop loss is 50 pips then the pip value will be $2 a pip. You need to take a trade with 0.2 of standard lot or 20,000 units. You can do it even with 1:2 leverage. Most brokers give you higher leverage.

As I mentioned before money management rules require discipline. It is very tempting to violate the rules of money management when you see a streak of winning trades. You may feel invincible with your system and take a much bigger risk in your next trade hoping to double your account. But the next trade may turn out to be a losing one.

Albert Schmidt is a part-time currency trader. After quite a few months of struggle he learned to make consistent profit trading in Forex. Review a trading strategy he successfully uses in his trades.