Money Management for traders is a subject that has been beaten heavily by many writers and authorities, people make all sorts of claims, some of them make sense and some of them are completely silly.
This topic is one that people will have to evaluate for themselves and draw their own conclusions as to what is going to be right for them and their trading plan.
I am going to list some ideas, hopefully those will trigger the reader to evaluate what is best for him/her to incorporate into their trading plan.
The thing we can not control is what our market will do next, what we can control is what we do. Evaluating what we will do as far as a trade entry is something that we can control and through trial and error and experience we can determine what will work and what will not work. That is an individual thing, not what the guru says, not what the people in the forums say, but what we actually develop for ourselves.
Let’s look at some criteria related to Money Management..
There are many theories about this . Some people prefer to use a fixed lot size or a portion of a lot. Others prefer to use a percentage of their account equity or a portion of their account. There are recommendations to use as much as five percent of the account balance or two percent of the account balance. This is an individual decision based on how much risk a trader is willing to take, the size of his account and what he is prepared to lose.
Personally, I am a bit timid and use two percent of the account equity so that if I am doing well the trade size increases and if I am not doing well the trade size decreases. I might mention that I am quick to reduce the trade size to one percent if lady luck decides to flee for a few days…. One prominent broker recommends no more than one percent trade size.
Personally a stop loss is mandatory for every entry, and the reason I say mandatory is that I have been tempted to think that I could apply a stop mentally…. Adn thereby lost a lot of money, more than a few times.
The best entries can go bad, the best traders can have a run of mistakes and poor entries, and if they are not paying attention they can clobber their account very quickly. I suggest a limit of three bad trades and then get out of the market for a while or take the rest of the day for something other than trading.
Taking losses is sometimes devastating and can destroy confidence for tomorrow.
If it is a bad day…… get away from the charts and do something enjoyable and return tomorrow.
Cut Losses, allow Profits to run.
Back to the Stop Loss, through experience you will develop what stop loss is appropriate for the trade entry that you use, hopefully a hard stop. The mistake that many traders make is that they will move the stop again and again hoping that the market will move their way. And that will lead to a disaster.
Many people advocate for a risk:reward strategy for stop loss and take profit. That has to be something that a trader will do his own research on and develop the ratio that works best for him.
In my trading robots I usually attempt to get a ratio of better than 1:2 and hopefully that will lead to some profits……. (robots are not always profitable, even with excellent testing).
Daily Fx has an excellent article here
Forex brokers love to tempt us with leverage…… huge profits with great leverage. And that can quickly be a disaster. We have to use caution in this area. Although a great marketing tool for the brokers, high leverage can be most damaging to a trader.
I will continue this another day as there are many more aspects to Money Managment for Traders.