money management

If you want to be a successful trader you should know that the first thing you have to do is to preserve your capital. Risk management protects your money. Most of the time, newbies do not consider the losses that will mandatorily occur in their trading plan, they only think about the gains. Money management or risk management consist in entering trades that will respect several conditions: · For each position that you open, you must know exactly how much money you are ready to risk and depending on that parameter; you should adjust the size of your position and/or the level of your stop loss. · Once in position, your goal is to protect your gains and limit your losses. While the market is in your favor you have to adjust your stop loss. · Exiting positions is important when you feel the market is going nowhere. Take your profit and exit. Each trader should obverse this concept because it allows your capital to increase and your trading account will appreciate with time. You are guaranteed to be able to trade the day after. The money management: a simple technique. The following money management technique is a basic tool for the newbie trader. It includes simple notions as risk management by adjusting sizes of our positions and moving your stop loss. Size of your position: At the beginning the size of the position should be fixed; working with money that represents a percentage of the total amount on your trading account (margin included) allows you to intervene as much as you want in regards of where the market goes. For example: If you have in your trading account $15000 with a margin 40, then you have a buying power of $600000= 15000 x 40. Depending on your broker, you can trade lots by $50k or $100k hence you have the ability to trade 12x50k$ or 6×100 k$. This choice is very personal and depends on each trader’s risk’s aversion. Stop Loss Placing your stop loss is very simple. Your main goal should be preserving your capital so each time you open a position, you should consider not trading more than a percentage of your capital. For example, suppose that you have $15000 in your trading account, you trade lots of 50k$ and you accept to lose 1% of your capital on each position. 1% of $15000 represents $150 and suppose you have 1 pip at $5 on euro/dollar, you should put your stops at 30 pips maximum from your entry. As long as the trend is in your favor, you can move your stop loss but never remove it in order to protect your trade and thus lower your risk. Of course in my trades, my stop loss is never fixed, I will not put my stop loss at 30 pips exactly, I will include in my analysis the notion of volatility which allows me to move my stop loss in regards of the characteristics of the market, which decreases the risk. Yield vs. Risk Regarding where you put your stop loss, you may assess if the trade worth the yield vs risk. This part is based as well on the technical analysis of the price, which allows you to assess the potential of your trade. Generally speaking, if the potential is less than 4 times the stop loss, I will not trade. For example if I have a stop loss at 30 pips, my potential gain must be more than 90 pips. You can be wrong 3 times on 4 without losing your capital (3 losses of 30 pips = 1 gain of 90 pips), so you have to assess every time your yield vs. risk. Following the trade Following your trade allows you to maximize and protect your gains by moving your stop loss. You can also open new trades once the trend is in your favor. In the following example, I am short on euro/dollar at 1.2875. I move my stop loss on the moving average 50. I open a new trade short at 1.2835, my stop loss follow the same moving average until it reaches 1.2815. So this trade is a profit of 60 pips for the 1st trade and 20 pips for the 2nd trade. Total +80 pips, we made a profit of 30% more with a risk management. Exiting the trade The exit can be done on stop loss or on target. Each entry can be treated independently in 2 steps : · As long as the yield vs. risk is not reached my stop loss are at a maximum level, they move fast. · Once the yield vs.risk is reached we can take more profit in order to follow the trend as long as possible. The 50% rule Here is a trading strategy and money management among others: the 50% rule. You have a winning trade and you don’t know what to do. Should I take my profit or leave it for more? Why not take 50%? Suppose you have a profit of 50 pips on a trade on euro/dollar for 50000 units. If you take 50% of you gains only, means 25000 units so (2.5×50=)$125, you take already a interesting profit. If the trade goes the other way, it should go by 100 pips in order to lose on this trade. If the trade is in your favor, your profit will be more interesting. Good luck every one do not forget that your success depends on your money management.