Money Management

Good money management is what makes your account goes up or down, and part of that is how you manage your risk. That is what i want to talk about in this blog post.

Every trader takes risk but not evey trader manage their risk properly. The first part of managing your risk is the size of your account you need to take in mind. What percentage of your account you should be risking per trade. Two percent is what is recommended. Following these guidelines can minimize losses if their are bad market conditions.

Beginners should never risk more the 2% of their account on a single trade. Let say you have 50000 in your account, which is my recommended amount to start in spot forex, 2% of that is 1000. That is the amount you should risk on a single trade. You can also make things a little tougher, you can split that 2% into two half. Let say you want to trade EUR/USD and AUD/USD, you can put 1% on the EUR/USD and 1% on the AUD/USD with the correct calculation of your stop loss and your take profit which is 50% of each trade. Therefore, take half of the trade of the table is good practice. 1-2% a day can grow your account to over 200% at the end of the year.

Most of the time your exit indicator will get you out of bad trade before you hit your stop loss, so your not going to lose 2%, you just put your stop loss there. Therefore, forget about this 2:1 or 3:1 ratio, you are a loser if you trade like that, just scale out.

A simple structure

Let say you have 5000 in your account and the EUR/ USD is going short for two months now. You will put up your ATR indicator on your chart so you can see the average of how this pair move the last 14 days. Let say it move 90 pips on average. Your stop loss should be 1.5 × the ATR away from where price is now. For example, if the ATR for the EUR/USD is 90, 90×1.5 =135. Therefore you stop loss will be 135 away from current price. Next, we use the ATR to find the pip value. First find out what is 2% of your account. If you have a 5000 account, 2% is 100. Next, what is 1.5 × ATR of your currency pair. Which is 135 as about. Your calculation is like this 100÷135 = 0.7405, is your pip value.

If EUR/ USD move 200 pips and you decide to scale out, your profit is 148.1. In addition to your risk calculation your not just going to need a good conformation indicator that confirmed a trend but an exit indicator that gets you out of trades before your stop loss ever gets hit, this is how you take risks and minimize losses.

Scaling out

This is how you continue to take money off the table. Every professional trader scale out. You cannot just set a 2:1 ratio strategy and waiting for price to hit your stop loss or the profit level. If you do, price most of the time does come close to your price level and retrace to break even and in most cases hit your stop loss. That’s how 99% of beginners blows up there account.

You need a better strategy to maximise your profit and the scale out plan is that strategy. Before you do this part, you should know how to enter a trade as i show you above with the ATR indicator. Never enter a trade without you consulting your ATR. This is vital for calculating your risk properly. After you have done that and you enter your trade, you wait for price to reach at least half the take profit level then you begin to scale out. In general, whatever the ATR of the pair you’re trading is at, that must be the amount of pips it must reach before you take your initial profit.

For example, if you are about to trade EUR/USD and the ATR is 95 pips, 95 pips should be your profit initially but here is a better strategy, instead of taking one hold trade and waiting for that initial take profit level at 95, you can take that 2% risk profile and split it into two half trade, 47.5 pips on one and 47.5 pips on the other trade. After you have done that, you put stop loss on both trade in there proper place. On One of the trade you enter in where you want to take your initial profit this trade will close automatically once it reaches it take profit level which is the same amount of pips 47.5, move your stop loss to break even and just let that trade run. This is how you make small wins all the time.

Scaling in

Should we scale in? Scaling out is the art of taking some profit off the table, while scaling in is when we add on additional position to trades that already exist. If we’re in a winning trade that is trending, the hold idea behind most traders is to scale in. This can be done two ways.

1. You can wait for a retracement . 2. You can just jumped in.

Stop! Don’t you ever scaling in. Remember we here, we trade with an algorithm and there is nothing in our algorithm that is saying we should add on to our trades. Adding on to a trading position is like a dallor cost average strategy, which doesn’t work in spot forex. Dallor cost average works well in stock trading, not spot forex. When you do something like that you are taking lots of risk. There is a lot of factors that comes into play when you do something like this. One aspect is you are undisciplined.

If you decide to build a system and over a time period the system is tested and proven, and you decide to follow that system no matter what, then you well develop discipline and courage. You well start to trust and believe in you self. You well develop faith knowing that your system is profitable. Therefore, nothing should be able to let you deviate from that system.

Here at Traders University, we teach beginners and help them to develop an algorithm that is profitable. When you have an algorithm that you follow and you don’t get a signal to add on to your trade you simple do that. Do what your algorithm tells you to do. Do not let your emotions get in your trade.

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The forex journal every trader should have

Concluding

Therefore, when you decide to make a trade, having a good risk management plan is the key towards a successful trade. Money management, trading psychology and trade entries is the key towards being a successful day trader. With these three, you can attend new highs in your trading career.