This topic is close to my heart. Having suffered 3 margin calls myself, i know the disappointment and pain that comes with it.
Proper money management is absolutely critical to your forex trading. In all my experiences and discussions with many others, there is no way one will hit the ground running. Proper money management will allow your account to survive, learn and trade another day when you hit your stop loss.
Consider these scenarios ( simplified )
Account of $100, Risking $20. A loss will set you back by 20% ($100-$20=$80) and you will need a performance of 25% to get back to $100.
Account of $100, Risking $3. A loss will set you back by 3% ($100-$3=$97) and you will need a performance of 3.1% to get back to $100.
The choice is obvious.
Please feel free to comment and share your thoughts. Letâs learn forex trading together!
Further Readings -
The story of a margin call. Tom.
Proper Money Management may be the holy grail for trading
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Proper money management also includes expectations. The more you expect, the more likely you take on more risk.
How much would you want to earn from a $100 account?
Letâs say $10. Now letâs imagine you would like to have this amount of profit every month.
This gives you $120 from your initial capital of $100, a 120% profit in a year.
Warren Buffettâs Berkshire Hathaway has generated an average stock price gain of 20.8% per year.
Hope this helps you take a relook at your expectations. Forex is never about becoming rich fast.
Hey trading801,
Thanks for sharing out this topic. Appreciate it.
I would like to add in some info as well hopefully it will help to those who may concern.
Having larger capital to trade is advantageous. That is why do not trade will small capital. Next question people will usually ask, how much capital is big enough?
- The answer, it depends on your trading system. If letâs say you are trading on a larger time frame like the daily chart. The stop losses could span through 200 pips or more depending on the pairs you are trading.
Example:
Balance: 100 usd
Risk : 1%
Risk in terms of dollar : 1 usd
Stop loss : 200 pips
Pair: Eur/Usd
Now to calculate the position size: 1usd / 200 pips (roughly) = 0.005 usd per PIP.
0.005 x 10000 units which is 50 units. Whereas in micro lots account, we are allowed to trade the lowest for 1000 units which is 0.01 in position size.
So in the scenario, we could not use the 1% principle mainly because of the small size capital.
- The idea of risking 1% or less is basically to open more trades.(this is dependable on the system that you are trading). More trades will generally means more chance for you to yield profit from the market itself. Please note that trades are made from your fixed system itself. Donât do this for the sake of trading in a higher frequency. (Dependable also on trading system).
Example: 20 trades ongoing
Risk: 3% (in this situation i show higher risk as in to compare with lower risk money management)
Ongoing trades: 20 trades
Trades status : 20 trades are in red (half of stop loss which is 1.5 percent per ea loss and it happens)
1.5% x 20 trades = which makes 30% drawdown so to speak. If you are risking more generally it could be more since and you will definitely reach margin call if you overleverage your account due to small in balance.
Therefore your trade will be closed automatically by the broker without your trades closing by hitting TP or SL.
In a nutshell : trade with a bigger capital. It will bolster most of your problem.
It is important to talk about leverage because it is an obvious advantage. If with one euro we can buy for 400 euros of a currency, we can earn a lot of money, even with small variations in prices.
Suppose I invest ⏠200 with a leverage of 1: 400. I buy dollars at a rate of 1,302 for each euro. A while later the change is 1,301 and I sell everything I had bought. As I bought with 80.000⏠(200Ă400) I get a small benefit of 61⏠(0,07%). But regarding the money that I really invested, the benefit is noticeably higher (30.5%).
With this example, we see clearly how a very small variation of the quote can be used to earn enough money.
He is a value - looooong term investor and part of his strategy is to buy and hold.
Even the stock market returns on average about 10% per year over the long term. Just buy and hold.
However, I am not particularly keen on comparing forex (short term) trading with investing.
As traders, we should aim to perform a lot better than that otherwise it is not worth the time or risk.
If the benchmark is 20% per year one might as well adopt a buy and hold strategy using little to no leverage. I can think of so many more things that would be worth someones time, rather than trading week in week out to make 20% per year.
In terms of $ amount, how much is that for a typical account size? $200?
Iâd imagine closer to $20k to $40k for accounts where this is taken seriously?
Itâs not uncommon to find retail traders who have low to mid six figure accounts.
Many people dont have that kind of money or the means to put it in a trading account but still take forex âseriouslyâ
It is uncommon, about 80% of retail investor accounts are less than 10-15K
And about 80% of retail traders lose money - youâve just answered your own question with who takes it seriously and who does not. Too many traders are under capitalized, itâs been a proven point.
Just because most traders lose money, does not mean that they dont take it seriously.
If someone put 100K in a trading account, would that make them a profitable and serious trader?
Or just a trader that can lose some serious money?
You need skin in the game to take it seriously if you want to turn it into a full time career choice - thatâs where iâm coming from when I use the concept of âtaking it seriouslyâ.
Bank roll has a huge impact on what you can and cannot do in the FX markets, and other asset classes too.
Yes, I agree but âskin in the gameâ is relative to ones means.
If someone only earns $1000 per month and they put $2000 in their account, they are taking that seriously.
Yes I agree - but now we are going off on a tangent 
Back you your quote of making perhaps 20% a year and why bother, well with a large enough bankroll it all of a sudden becomes rather attractive at low risk, low leverage and buoyant capital.
Most people cant afford 100K and then to only make 20% or $20k per yearâŚ
Is that really worth someones time, if they can afford to put 100K in their trading account?
I donât think so. Their time is more valuable than that because its not a buy and hold where they can focus on other things. Its trading day in day out, week in week outâŚ
Not really, the people who iâve met who are making money and who do have large accounts are actually doing quite the opposite to trading day in and day out. Yes they value their time, but they also have a diversified & prudent investment plan whilst understand that FX is one of many different ventures to glean a return from.
Sure you could chase the S&P and throw all your eggs in one basket - but thatâs not smart and thatâs why some traders use FX as one outlet to spread the overall risk. Hope that makes sense.
It makes sense,
My point is that we should be aiming to do better than 20% per year.
A lot better.
This has always been a sticking point on what âshouldâ be made from FX, the more the account holder has the lower the expected returns go hand in hand. If you can make a few percent per month with minimal drawdown then youâre already in a good position. Itâs rare you will see a verified FX account where this has been achieved for 12 months with stable and sound risk being used.
If you can make consistent and stable returns with minimum draw down then you might want to consider managing other peoples money. For a % of the profit.
The money will find you if you make your record public and in the the right places.
10-20% per month, yeah!
20% per year is better than most but why not aim for that monthly? at leastâŚ
And now we have made a full circle back to your first post - 80% of traders (probably more) blow their accounts because they have this same assumption. Itâs just not possible, itâs not been proven and we would all love to see it on a verified account over at least a 12 month period.
Anyway, this has been discussed in great detail in many many other threads here and they all boil down to the same point which is⌠no one has done it.
Its difficult, very challenging, yes.
I would not go as far as to say it is impossible (Im possible)
Risking 2% per trade with a risk to reward ratio of 1:3 will net 6% per trade.
There is one trade a week where this is possible.
If you can do that for 4 weeks, thatâs 24% for the month.