Money Management Strategy in Forex or Stock

This article deals with one of the most important aspects of trading - money management.

Although there are plenty of trading systems and trading strategies with good win/loss ratio, proper money management can change the outcome of the net profit amount for any trading system.

Essentially, money management strategy is a statistical tool to control the risk exposure and profit potential when we enter into a trade; and by applying it, we can control our emotions and lack of plan (the main reason why most of traders lose their money).



The importance of determine a stop-loss

C.O.N.T.R.O.L... When a trader lose control the results are often disastrous. Many traders often enter the market with a profit target, but without a clearly defined protective stop-loss.

With a pre-determined profit target and a pre-determined stop-loss, you know where you will get out if you are wrong and where you will get out if you are right. In other words, you have control.

Diversification - Trade more then one currency pair

When trading more then one currency pair, i.e. EUR/USD, USD/JPY, USD/CHF, GBP/USD atc., each pair would have a different stop-loss and profit target. With multiple currency pairs, each having a different entry and exit points you can smooth your system equity curve so your account draw-downs will be smaller.

Note: It's important that you diversify your orders between currencies that have low correlation.

Case study - Fixed Ratio With Fixed Number of Trades

Money management is the most significant part of any trading system. Our Forex money management strategy is simple to implement, conservative and practical when combined with one of our trading tutorials strategies.

First of all, you should understand the following terms:

Fixed Risk Ratio
Never risk more than 2% of your account size on any single currency pair, if possible, risk less. Plus, never risk more than 10% in any complex of open positions, on any given day. For any given trade you must know how much you will lose if the market goes against you.

Example - According to our money management strategy, you should be risking no more then 2% of you balance per single trade. So, if you start with $1,000 account size you may lose up to $20 in one trade, i.e. If the trade is stopped, you will lose $20 which is 2% of your initial balance.

Please note: You can open up to 5 parallel trades (other pairs), at the same time - max risk = 10% from your initial balance.

Fixed Number of Trades
The "fixed number of trades" parameter derives from the trading system profitable factor, as follows:

Trading System Percent Profitable (no. of winning trades / total no. of trades)	fixed Number of Trades
60%	40
65%	35
70%	30
75%	25
80%	20
85%	15

Forex money management strategy implementation

Now that we have these two parameters (the fixed risk ratio and the fixed number of trades), let's make an example:

• Account size = $2,500


• Fixed Risk Ratio = 2%


• Fixed Number of Trades = 30 (we use trading system with 70% winning trades expectation - see table above).

In this case we can lose up to $50 ($2,500 * 2%) at any given trade for the next 30 actual trades. Then, after 30 trades we will re-calculate our maximum risk amount, i.e., if the new account size is now $3,000, we can afford to lose up to $60 at any given trade for the following 30 trades, and so on.

Basically, we re-calculate the risk amount (based on the fixed risk ratio and account balance) after each fixed number of trades, in this example, 30.

Note: You can adapt this money management strategy to fit smaller or bigger trading accounts, providing you stick to the 2% risk rule.