Newbie question about money management

Beginner Questions
1

Hello all,

This may seem like a dumb question, but I have chosen to make a career from Forex trading, and I know money management is one of the keys to becoming a successful trader.

I know I want to trade 3% to 5% of my account, so my question is, is their some sort of formula to figure out how many lots you trade versus the persentage you are trading from your account?

From reading these threads I have realized the only dumb question, is the one not asked.

Thanks for the help.

Happy Holidays

2

One way to do it would be as follows:

Find risk %, percentage you are willing to risk on any one trade.

When you develop a trading strategy edge, you then need to find what is the usual drawdown for it on a loss and what is breathing room. Trades may go a certain amount against you before going with you. For instance I know with my current edge, the trade sometimes may go -30 pips before going my way. You have to find a point at which you go, “too much it aint coming back, let it go and look for another entry with my edge.”

Take your stop loss, (-30 pips) and divide your risk by that.

Lets say you have a $500 account and want to risk 1%. 500x1% = $5

Risk / stoploss = lot size $5 / 30 = .17 cents per pip.

Of course doing it exactly this way you will have to trade at broker like IBFX that lets you fractionalize lots, which makes money management easier.

3

Thanks for the help. I am going to start my account with $3000.

I understand, so now I am working on a stratagy that works for me.

Thanks again

4

MM is very important for succesfull trading.
There are three steps involved to decide your trading amount:

  1. for every particular trade you must decide where you want to put the SL. For example you have decided to go long (buy) EURUSD at level 1.3975 with SL at level 1.3775 (because at 1.38000 there is major support level for EURUSD). So your SL will be 200 pips.
  2. Let’s assume that your capital is 10’000 USD. If you want to be succesfull and long term trader then you MUST NOT risk more then 2% or max 4% on every particular trade. In our example lets take 2% , so it will be 200 USD (2% from 10’000 USD).
  3. The last step. We decided that we want to put SL 200 pips awayt from current price and we can afford risk that is equal to 200 USD. Now we must find out value for 1 pip. In our case it will be 200 USD/200 pips = 1 USD. and now the final step - trading amount. The one pip value will be equal to 1 USD, if you will trade 0.1 lot EURUSD.

Thats it :slight_smile: