You’ve made one math mistake.
But, your math mistake is NOTHING compared to the money management mistakes in your scenario!
Let’s look at the math mistake first.
You said that you could protect yourself from a 1000-pip move against you, by setting aside a reserve (you called it margin)
of $500.
The actual situation is this: a price move of 285 pips would result in a margin call, which essentially means that your broker would close all of your positions, book your losses, and leave you with $1,300 of your original $5,000.
Here’s why: When you trade 13 mini-lots, you are establishing a $130,000 currency position. As soon as you open this position, your broker sets aside 1% of your position-size as margin (assuming your broker allows you a maximum of 100:1 leverage,
which is the case with most brokers).
One percent of your $130,000 position is $1,300 margin. For the duration of this trade, this margin amount is not available to cover losses. That leaves $3,700 of your account available to cover losses.
A loss of slightly less than 285 pips per mini-lot x 13 mini-lots = $3,700 loss, at which point your broker closes your entire position. Your account balance is now $1,300 (in other words, your margin has been returned to you).
Let’s get real now, and consider real-world money management.
You haven’t revealed the whiz-bang trading system that can produce these 6.5-pip gains every day, day after day, for 260 days
in a row, without a game-ending string of losses.
The two metrics most commonly used to evaluate a trading system are: the WIN RATIO and the REWARD/RISK RATIO. If you tell us the win ratio and the reward/risk ratio of your system, a simple mathematical formula can tell you:
[B] the probability of a string of losses resulting in the complete wipe-out of your account[/B]
Write back with those two metrics, and we’ll crunch the numbers.
Clint
