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# Money management

Discussion in 'Forex Trading' started by drasfs, Jan 12, 2008.

1. ### drasfs

Which one do you use? Mine is( I will try to explain Mine):

If i for instance had 15 000 dollar, and traded with oanda, which offer 50:1 in leverage- each trade would then be 2.5 lots and: take profit =5,Stop loss=5.

If my TP=10,ST=10, i would change my lot size proportionaly to 1.25 lot and so on

If you had no skill in forex and used this moneymanagement method and had a winning and losing chance of 50%. You would, after making 100 trades have lost(when the pip cost is 1.2): 50*1.2= 60

You would have lost 60 pips after 100 trades. If you traded on short timeframes,(when tp=10,St=10), you would have lost 60.1.25=75 dollar, which is 0.005% of your account size

These arn't exact numbers. But i do however, recommend this setup to people who are new to forex, and maybe heightening their lot size from 1.25 to 2-3 lots when they finally make more than 60% winning trades. 57% is the least you have to make to break even, because of the pip cost.

If you had 75% winning trades, 2.5 in lot size, 5 trades each day, tp=10,ST=10 you would make(ive already done the calculatons for you):1025 dollar a month, which is a 82% return on investment. This might be exaggerated a bit, since it might be difficult to generate 5 trades a day. 2.5 trades shouldnt be impossible though, so at least 41% a year, if you dont increase lot size during the year =)

A simpler way might be to never risk more than x% of capital on a trade. The 'x' would depend on things like experience, strategy, and ratios.

3. ### rcanfiel

50:1 leverage is how people manage to lose their money in a sudden, unexpected implosion. Sometimes in just minutes...

There's an important distinction between 'offer' and 'use'

5. ### drasfs

If you use, 1.25 lot, and stop loss is 10 pips, and account size is 15k, then a loss would equal 125/15000= 0.0083% of your total account size.

I cant see how you could lose all your money in an instant, since you would have to lose: 15000/125= 120 times in a row to blow your whole account away(though, a margin call would happen a couple of trades earlier)

Or are you maybe referring to market gaps that jump past the stop loss trigger? Well, i've in rare instances seen market gaps of 40pips, so that would at most equal about 3% of your account size.

To cicrumsize the impending risk of market gaps during volatile times, you just have to get more accounts, never risking more than the account size. Preferably, have 5-10% of your capital on each account.

6. ### drasfs

exactly. However trying to remember the proper use of % is as has hard as remembering which direction east and west is :/ Still havnt learned it after my economic degree....

You're obviously talking about mini lots of \$10k, yes? So 1.25 mini lots is 12,500 and an average pip value would be \$1.25. Using a 10 pip stop means a loss of \$12.50, or .083% of your \$15k account.

Way too many 'if this and if that'....and you need a new calculator

8. ### drasfs

yes, it was mini lots, so stop blaming my holy math skills.

Anyway I agree that my explanation was a little bit on the illustrative side, but I was genuinely looking for some constructive criticism(not on my great math skills though).

No, it's much easier, and you can adjust trade size up and down according to account balance. The more you lose, the smaller the trade size. The more you win, the larger the trade size. It's much more versatile.

Another benefit is you can work out trade size exactly, based on your stop and equity. Stops vary from trade to trade as we know, therefore trade size has to change to stay within your risk parameters.

eg:

Account balance \$12,849.63
1% = \$128.50
Stop for this trade 23 pips
\$128.50/23 = \$5.59 per pip, trade size \$55,900

Let's say you win that trade and make \$210, your account is now \$13,059.63.

The next trade doesn't look so great and you might only want to risk .5%, and your stop needs to be wider at 28 pips and as there's data coming out Oanda are widening spreads to 20 pips so the stop has to be 48 pips:

Account balance \$13,059.63
.5% = \$65.30
\$65.30/48 = \$1.36 per pip, trade size \$13,600