Money Management – The Holy Grail Forex System

Written By: admin on March 12, 2010 No Comment

Forex traders have become accustomed to trading massive broker-provided leverage. I’m often asked about my reporting and how I can have a loss in pips but a gain in equity. It’s not that difficult really. Pips don’t really count. If you are trading sensibly, and using proper money management, every pip has a different dollar value. Signal providers usually choose to report in pips instead of equity because of this. It’s much easier to be positive in pips than it is to be positive in equity.

Here is an example of the power of proper money management:

Initial Account Value: $1,000.00

Risk: 2%

Trade 1: 200 pip SL
Trade 2: 150 pip SL
Trade 3: 20 pip SL

Trade 1 risk = $20.00
20 / 200 = .10
Trade 1 stops out: <20.00>
New account balance = $980.00

Trade 2 risk = $19.60 ($980.00 * .02)
19.60 / 150 = .13 <–round down to .10. Never round up!
Trade 2 stops out: <15.0>
New account balance = $965.00

Trade 3 risk = $19.36
19.36 / 20 = .97 <–round down to .90. NEVER round up! DON’T DO IT!
Trade 3 takes profit +48
new account balance = $1,008.20

Pip balance: -302
Equity change: +$8.02

This example provides a 302 pip loss with a small positive financial outcome. This is the real power of money management. When you allow your stop loss value to determine the amount of money you leverage instead of the amount of money you lose, you enable huge gains on small stop trades, and maintain a controlled amount of loss. Let’s say that you can sleep with about $20.00 of risk per trade? Figure out the percentage of your total account value and trade down to the sleeping level. This is how you trade emotion free, my friends.

I have an advanced money management system. It’s much more powerful than “trade 2%.” Trading % is better than nothing, but it is not a money management system. I have an MBA and several years in strategic planning and consulting for the banking industry. If you’d like to know more about professional “banker” money management systems, email me at support@mmedge.com and I’ll be happy to speak with you.

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