Basic money management Q

Hello everybody,

I’m just starting my Forex trading adventure, and I can’t find a clear answer to a basic money management question, hope someone here can help:

What is meant by not risking more than 2% per trade, is it 2% of account balance per trade OR set a SL at 2% loss of balance?

e.g.: assume: $100 account, 1:10 leverage
Scenario 1: trade $2x10 per trade, setting SL where I see fit (say 50 pips abovebelow)
Scenario 2: trade $100x10 per trade, setting SL at the pip equivalent of $2 abovebelow

so which is it? (or am I completely off here? )

Thanks in advance!

Its neither really, but its closer to scenario 2

When you lose, you want the loss to equal 2% of your account balance

You need to put the stop where it makes sense. That might be 10 pips away or a 100 pips away. Decide on the where the stop needs to go, and then adjust your position size accordingly.

Basic money management for 2% means that on any one trade you have no more than 2% (max!) of your account at risk, most will use 1% rule.

As to your scenarios both are wrong, you will risk near 100% of your account for one trade and have a margin call.

Lets start with some basics, leverage refers to how big of a position you can trade, i.e. your margin requirement. If you wanted to trade $100,000 lot (standard $10/pip USD lot size) you only need to place $1,000 in escrow at 100:1 ratio. At 10:1 ratio you must place $10,000 into escrow to trade the same lot size.

So you want a $100 account with 10:1 ratio. I will assume that you only want to experience trading live and never making money with Forex on this type of account as you never will make any money with that leverage.

Okay the math: Margin Percentage = 100/Leverage Ratio; Leverage Ratio = 1/Margin = 100/Margin Percentage; Margin Requirement = Current Price x Units Traded x Margin;Example- Required Margin = 100,000 x 1.35 x 0.01 = $1,350.00 USD.

Margin is easy, at 10:1 you have a 10% margin (100/10=10%) or .1 . So lets get to the trade, say you want to trade the EUR/USD with entrance at 1.35. How much can you trade, what size units will you use, how much sl can you use?

Immediately we note that you have to put 10% of your account in escrow and thus 10% of your account is immediately at risk if the trade goes against you too much, but how much currency can you purchase?

X * 1.35 * .1 = $10, solve for X. Well this embarrassing part is here that X = $74.07, which means you can trade at most $74.07 of the currency! So you will have to play with a broker that will allow you trade a penny per pip or less :mad::eek::stuck_out_tongue: Hopefully you see why $100 account with 10:1 leverage is a waste of time.

But to answer your original question. Lets say you have a $100 account and will risk 2% of your account at any one time. This means on a trade at most you can lose is $2 on this trade.

To determine your SL you need to know how much is each pip. If you are trading $1 per pip, you can only have a 2 pip SL, so if you enter a trade and it goes against you by 2 pips, you are out. Of course you can never trade as the spreads will eat that $2 at $1/pip. So lets drop to $.10/pip

At 10cents per pip you can place a SL of at most 20 pips (10cents * 20 = $2). So when you place the trade your initial SL can be 20 pips away (but you must take into account spread, if you have a 4 pip spread your max SL is 16 pips). However, realistically, you cannot trade at 10cents/pip as you would have to place all $100 of your account into escrow to purchase $1,000 of currency. You will trade penny per pip.

At a penny per pip you can have a 200 pip SL before reaching your $2 or 2% account risk :smiley:

Hey Hordane, Simbafx :slight_smile:

Thank you very much for the answers!

Sorry I didn’t say in my original post, I used the $100 example just to over-simplify, I intend to start trading with ~$2000US (Or rather, I will after I read more and hammer what you wrote into my head)

Well, at least I didn’t find out the hard way :slight_smile:

Simply remember this.

For leverage 100:1 or 50:1 is the standard, you want to be able to purchase a high enough currency lot to make it worth while. All leverage allows is you to put less money into escrow. Most brokers won’t let your escrow go negative so if you placed $100 into escrow to purchase $10,000 of currency, once a trade goes against you to equal -$100 they will automatically close the trade.

As for lot size, there is a quick calculator here: Forex Money Management Calculator | Position Sizing | Lot Size Calculator