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| LESSONS |  |
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Money Management simply means managing your capital - so that you will have enough capital to trade longer - hence improving your odds of winning.
In other words - money management is ALL ABOUT loss-taking - understanding when to call quits - it really isn't about MAKING money - its about KEEPING money - the old adage "penny saved is penny earned" is quite apt for this scenario.
Let's say you have 10,000 in your trading account (equity/capital) - a month later you recognize that you lost 10% of your money - bringing your capital to 9,000 - do you know how much return you need to get back to 10,000? - 10%?? - NO!! - its 11% - and it only gets worse as keep losing your capital.
Here's a table that outline the need for money management:| In this example the trader has 10,000 initial capital and was trading no more than TWO REGULAR LOTS investing $200 (2% of capital) with each pip worth $2 (FXCM has one standard lot for $100, each pip=$1) | | Initial Capital | Amount of Capital/Equity lost | Amount of return needed to bring the account back to its original amount ($10k) | Capital after
losses | 2 - 4% of new capital (per trade) | # of lots($100 for each lot) | Pips needed | | 10,000 | 10% | 11% | 9,000 | 200
(2.2%) | 2 | 500 | | 10,000 | 15% | 17% | 8,500 | 200
(2.3%) | 2 | 750 | | 10,000 | 20% | 25% | 8,000 | 200
(2.5%) | 2 | 1000 | | 10,000 | 25% | 33% | 7,500 | 200
(2.6%) | 2 | 1250 | | 10,000 | 30% | 42% | 7,000 | 200
(2.8%) | 2 | 1500 | | 10,000 | 35% | 53% | 6,500 | 200
(3%) | 2 | 1750 | | 10,000 | 40% | 66% | 6,000 | 200
(3.3%) | 2 | 2000 | | 10,000 | 45% | 81% | 5,500 | 200
(3.6%) | 2 | 2250 | | 10,000 | 50% | 100% | 5,000 | 200
(4%) | 2 | 2500 | | Fact: About 1% of traders worldwide can make 100% return - 99% of traders never reach that goal. |
After this point, you can no longer afford to use $200 per trade from your remaining $5000 capital, because you hit max of 4% per trade. Trading anything above 4% of your current capital is never advised.
Also, take note of # of pips that you need just doubled because you cut the lots by half (1 instead of 2) |
| | 10,000 | 55% | 150% | 4,500 | 100
(2.2%) | 1 | 5500 | | 10,000 | 60% | 185% | 4,000 | 100
(2.5%) | 1 | 6000 | | 10,000 | 65% | 185% | 3,500 | 100
(2.8%) | 1 | 6500 | | 10,000 | 70% | 233% | 3,000 | 100
(3.3%) | 1 | 7000 | | 10,000 | 75% | 300% | 2,500 | 100
(4%) | 1 | 7500 | | This is the end of the rope. |
| Trading beyond this point is never advised because you will be using much more than 4% of the capital just to get into the trade. |
| | 10,000 | 80% | 400% | 2,000 | 100
(5%) | 1 | 8000 | | 10,000 | 85% | 566% | 1,500 | 100
(6.6%) | 1 | 8500 | | 10,000 | 90% | 900% | 1,000 | 100
(10%) | 1 | 9000 |
As you can see in the above table - your investment which shouldn't be more than 2% of your capital/equity - as professional traders are required of when working for large firms - should be a guide for the home-based trader too.
The first column is definite in showing the original capital = $10,000
The second column shows the loss in percentage
The third column shows the REQUIRED amount of RETURN to make up for the second column losses
The Fourth column shows the capital AFTER the losses have been calculated
The fifth column shows the percentage of capital/equity need to open.
The sixth column shows # of lots that can be opened based on 5th column
Finally, the seventh column shows the actual pips needed to make up for the 2nd column losses.
The idea behind money management as noted above is to KEEP your money TIGHT - don't trade when in doubt stay out.
Losses can add up easily and will be hard to make up. So cut your losses sharply - here are few tips: - Write down a number (of pips - not dollars) - that you are willing to lose PER trade - not per currency, not per day - PER TRADE. Let's say you come up with 100-pips as max loss PER trade.
- Then come up with MAX-LOSS per DAY & per WEEK - let's say you MAX-LOSS per day = 150 pips and per WEEK = 300 pips.
- Find and execute ONLY those trades that fit rule no.1 - your stop-loss should not be more than 100-pips per trade.
- Say you executed a trade today and took in 75 pips loss - you have another 75 pips that you can play with (remember daily loss you set it at 150 pips) - that does NOT mean you HAVE to trade - if you find an opportunity - IF - then place an order that has a stop-order of 75 pips -else do NOT place an order just for its own sake.
- Say you couldn't find a trade after that 75 pip loss - IT DOES NOT CARRY OVER - your daily limit will always remain 150 pips - MAX LOSS.
- The same rule applies for Weekly limit - if you don't hit your MAX LOSS of 300 pips - Hey! congratulations you are doing something right - BUT remember, DO NOT CARRY IT OVER TO NEXT week.
- Every sunday afternoon, sit down just before the market open - with a cool mind come up with THREE numbers.
(1) Your daily MAX-LOSS (keep it under 100 pips if possible)
(2) Your Weekly MAX-LOSS (keep it under 300 pips if possible)
(3) Your WEEKLY/PER TRADE MAX-lots - maximum # of lots you are willing to trade (based on 2-4% rule) - keep it around 2% if possible
Stick to your guns and you will do just fine.
All the best.
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