If you have read, understood, remembered and are ready to use guidelines 1 to 4,
you have learnt some important trading rules and are on your way to start creating a solid trading plan. You now understand the
basic concepts of risk management and position management. This final chapter
deals with money management: How to control the amount of trading equity you
are willing to lose should a position go against you.
We recommend that you only risk a maximum of 10% of your total trading equity on
a single trade.
10% may sound like too little risk considering many online Forex brokers
offer 1% margin or 100 times leverage, which means that you could potentially
take a $100,000 position with just $1000 in capital. However, trading like this
can be dangerous as you could lose everything in a single trade. By risking
upto 10% of your capital on a single trade, you will still be able to make
good profits from successful trades whilst avoiding the risk of being wiped
out during a bad streak; Even the most profitable traders can have losing streaks
in which they could for example have 3 or 4 consecutive losing positions.
Successful
Forex trading is a long term investment which can produce excellent
returns if traded with control, discipline, patience and consistency.
Your
target should be to make substancial profits over the course of anything over
3 months. Wanting to double your money in a week is not the right mindset
with which to start trading. The risks involved are way too high and belong
in the casino!
Here is an example of a reasonably profitable month
for a successful trader. Let's imagine that his total capital is $20,000 and risk
appetite per trade is 5%.This would mean he is willing to lose upto $1000 per
trade. He always trades using a 100% P&L ratio (meaning that his stop-loss orders
are the same distance as his profit-take orders, from the position entry
level):
No. of Trades = 20
Winning Trades = 12
Losing Trades = 8
Total
Profit = $4000
REO/month (Return on Equity) = 20%
The example shows that he got 60% of his trades right and made an REO
of 20% for the month and he only risked 5% of his capital on every trade. This
is a good example of solid returns gained from the managed, low risk trading we
recommend in our guidelines.
With this type of money management, you
can confidently utilize and fine tune your trading strategy in a controlled
trading environment which focuses on long term success.
Well that's
it for the guidelines. I hope you find them useful, informative and most importantly,
PROFITABLE!
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