Money management question

Beginner Questions
1

Ok. I hear about money management left and right and there is one thing i don’t get. If the general rule is not to risk more than 2% of total account, does it mean that the margin I use has to be 2% of the total account? or does it mean that I have to adjust everything in a way that a losing trade will not loose more than 2% of account?

Here is an example:
Account balance is $1000

If I open a position right know, lets say I go long on Cable and I use 2% of my total account, that means I use about $20 to open a position where my pips will be worth $0.05 and my losses will be determined by my stop loss. In a worst case scenario I get a margin call and I lose my $20

If I open a position but I use enough to make my pips worth $1 and I set a stop loss of 20 pips, I also lose $20 but this trade is potentially more profitable because if I win, every pip will be worth $1

Let me give you an example. I’ve using the Cowa-whatever system in a demo account for 4 weeks. I made some good trades and some bad trades but at the end I made 260 pips in 4 weeks. In every trade there was a stop loss of the same amount or less pips than the take profit. In every trade I opened a position where my pips were worth $1. In the cases I lost, I lost something like 30 pips=$30, but then a winning trade will hit with either the same amount or higher or sometimes even less but, one trade after the other I will quickly recover. I guess I’m not taking into account the posibility of consecutive losses but oh well, that what I’m here for, to hear the critics.

So bottom line, I want to understand money management better because at this point I do not see a problem with constantly trading $1 pips as long as I set good stop loss

Any suggestions?

Thank you

2

You have it right. You shouldn’t risk more than x% of your account balance. 20 pips might not be enough in a pair like GBP/USD because of it’s volitility. I have been doing the same thing risking $1 a pip but like you said with consecutive losses than you can’t afford a large enough stop loss and keep it under 2%. That’s why I try to strategically place my stops under/over strong support levels, longer term trend lines, MA’s or even candlestick pattgerms (hammers, shooting stars, engulphin patterns, etc…). Actually Babypips recommends not risking more than 1% and if you have a good system that you backtested than you wil lhopefully win more than you lose so it shouldn’t be a problem.

Topgun

3

When someone says not to risk more than x% that means not taking a loss bigger than that. It’s not a question of the margin % you use, though they are related, since the larger your risk % is the higher your margin % is likely to be.

4

Thank you guys. You all really deserve all those pips you are making :wink:

Sebastian

5

Money management goes hand in hand with position sizing. Most money management books suggest risking no more then 2% of your account on any given TRADE and no more then 6% of your account in total (i.e you can have a total of 3 trades open at any given time, unless one of the trades goes up).

You said that you have $1000 balance in you account, but let us assume we have $100,000. With that being said, let us do some calculations:

STEP 1: Figure out the maximum amount you are willing to lose (2% of account size)

2% of $100,000 is $2,000, so the maximum you can lose on any given trade is $2,000. This will also lets you take 50 consecutive losses before blowing your $100,000 account. Having 50 losses in a row is not very likely.

STEP 2: Determine the stop-loss size you will need.

Let’s say you have determined that your stop needs to be 30 pips. The question now is “How much is each of those pips worth?”.

Step 3: How much is each pip worth?

1 Standard lot = 100,000 units
1 Mini lot = 10,000 units
1 Micro lot = 1000 units

Anything less than 1000 units is non-standard and is a function of Oanda.

To get the pip value, divide the lot size in units by 10,000.

For a standard lot this would be 100,000 / 10,000 = $10 pip
For a mini lot this would be 10,000 / 10,000 = $1 per pip
For a micro lot this would be 1,000 / 10,000 = $0.10 per pip
For 100 Oanda lots this would be 100 / 10,000 = $0.01 per pip

(for pairs NOT ending with xxx/USD, the pip value will be about 90% of the values shown above)

I doesn’t matter that much which lot size you choose, because the dollars risked will turn out roughly the same, so let me run it through for a mini, a micro and for oanda lots:

Mini Lot pip value = $1.00 * 30 pip stop = $30.00
Position size = $2000 / $30.00 = 66.666 Mini lots.

For increased safety, round it DOWN to 66 Mini lots. (never round up)
So you would enter the trade with 66 mini lots which equals 660,000 units.

Micro lot pip value = $0.10 * 30 pip stop = $3.00
Position size = $2000 / $3.00 = 666.66 Micro lots.

For increased safety round it DOWN to 666 micro lots.
So, you would enter the trade with 666 micro lots which equals 666,000 units.

Oanda “lot” size of say, 123 units:
Pip value = 123 / 10,000 = $0.0123 * 30 pip stop = $0.369
Position size = $2000 / $0.369 = 5420 lots times 123 units per lot = 666,660 units.

As you can see, the smaller your lot size, the finer control you have over your position size. (660,000 vs 666,000 vs 666,660) That is a major advantage!