In general my forex money management rules are Never risk more than 5% (maximum) on any trade.
When I started with a smaller account of $2000 I risked 5% and then reduced this to 3% as my account grew to $10.000. I have since reduced this again and now 2% is my limit.
If you take two $ trades or correlated* trades at the same time then 5% is the maximum exposure you should have for both trades.
Only risk 2.5% maximum if its a counter trend trade.
ALWAYS plan and place a stop loss.
Always plan your exits BEFORE you enter the trade. If 2 trade strategy, plan 1st target & move stop to entry on 2nd – then depends on your philosophy as to whether you set a secondary target or just let it run
Do not take trades with a less than 1: 2 risk reward ratio ie If your stop is 30 pips,make sure that the trade has a good chance of making 60 pips. Therefore you need to make sure that no major emas are in the way. A double top or bottom.
If you lose 2 trades in a row, reduce your risk to 2.5%
If you lose 3 in a row STOP for the day & analyse where you went wrong. Start again at 1.5% or go to a demo, BUT trading by the rules.
After 3 wins in a row go back to 2.5%.
Once you get back to a 60%+ win ratio, go back to 5% maximum
There are two schools of thought re using a demo account. I think that you should always start with a demo. It helps you to learn how the platform works and make trades without losing real money. The flip side of this is that a lot of people trade demo accounts very badly.
They start to trade with none of the discipline & trade management that they should use on a real money account. They enter trades and dont place stop losses or targets. They may have placed a stop and then moved it another 100 pips because they are convinced its going to go back down.
The bottom line is that from day one on a demo account you need to use your money management rules. If not there is no point. You will have loads of bad habits that when transferred to a “live account” will wipe you out very quickly.
Making trades on a demo account is NOTHING like the adrenalin rush you get when you have real money on the table. If you find that you constantly break these rules on a demo account, consider opening a micro account with a few $100’s where you get bet cents per pip. Its a compromise measure. Only do this if you can afford to lose the money in the account.
Followers Question re opening a “Live” account.
So how do we approach this in the real world? Eric sent me this, so I will use his figures to show you how I would manage his account;
“I will be opening a $10,000 live account and I want to make a profit of $2,000 a month ($100 a day) and risk no more than $1,000 a month. I’ve been trying a demo account with a credit of $10k and have been successful in making a $100 a day, but since I don’t have a good money management plan, I would risk too much on trades sometimes.”
The MOST important part of forex trading is to not lose your trading bank. To do this we need to strictly control the amount of money we are willing to risk per trade. Presuming that you have traded a demo account and now feel confident enough in your methods to get in to forex for real, how do you approach it?
Moving to a “Live Account.”
This is how I would approach Erics account; 1) I would leave $8000 in the bank and only start with $2.000. Why ? Often a new trader will blow their bank in a short period of time. A simple conclusion: It would be better to blow a $2000 bank than a $10.000. Then go back to a demo and learn from your mistakes.
a) On a $10.000 account I recommend that you risk no more than 2.5% of your account per trade.
Why ? Because if you have a losing streak you would need to lose 40+ times before you wipe your bank out. On a $10.000 account that would be risking $250. But believe me that that if you go straight to risking $250 per trade and have a few losses early on you can scare yourself from pulling the trigger later on.
A vitally important thing to note here is that if your 1st trade wins or loses then you have to increase or reduce your account balance calculation accordingly. For example: Your account balance is $2000 and you risked 5%/$100 and lost $100. Your next trade will be 5% of $1900, which is $95.
There is a tendency when things go wrong to keep staking the $100 as psychologically you still think of your account as a $2000. This can lead to ruin very quickly.
Remember fear and greed rule the forex market.
b) As I have explained many times before, 95% of new traders lose money. Often a new trader will blow their bank in a short period of time. There is a strange psychology that comes in to play where you are, say $1500 down. You now have $500 left. Mentally you seem to write it off. You now ignore all the rules and keep going for the “big one” to win it all back. The obvious outcome is that you lose the lot.
I have done this twice in my early days. You know you should stop, but the urge to “win it back” over rides your common sense, (revenge trading is a very dangerous habit you must learn to avoid).
Now you have lost the lot. Most new forex traders quit. They just KNOW that there is money to be made here but they just can’t make a success of forex. The rest dust themselves down, go back to a demo account and come back again when they have another bank not unlike a gambler in a casino.
(Personally I think that trading forex without rules & discipline is far nearer to gambling than investing). Anyone who suggests you “invest” your life savings in forex is seriously not to be trusted).
To be continued Part 2