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www.sm-forex.com This is the most overlooked aspect of trading by new traders. Miss out this chapter at your peril because failure to employ good money management principles will bust your account no matter how good a trader you are. Good money management keeps us in the game when most novices are knocked out. Many traders see the trades but don’t manage their money very well and ultimately they lose all their equity.
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(C) Copyright 2006 Stephen Margison www.sm-forex.com
“IT’S TIME TO GET MORE OUT OF LIFE”
www.sm-forex.com
Money Management
The Forex Codes Money Management
• This is the crux of the whole Workshop
• Failure to employ sound money management principles will bust you no matter how good a trader you are!
(C) Copyright 2006 Stephen Margison www.sm-forex.com
The Forex Codes Money Management
• Never risk more than 3% of your equity on any trade
• This is not a get rich quick scheme
• Protect your Equity at all costs!
(C) Copyright 2006 Stephen Margison www.sm-forex.com
The Forex Codes Money Management
(C) Copyright 2006 Stephen Margison www.sm-forex.com
The Forex Codes Money Management - Drawdown
• If you have an equity pot of £10,000 and you lose £5,000 then you have a 50% drawdown
• It is easy to lose money and hard to get it back
(C) Copyright 2006 Stephen Margison www.sm-forex.com
The Forex Codes Money Management - Drawdown
(C) Copyright 2006 Stephen Margison www.sm-forex.com
The Forex Codes Money Management - Drawdown
• Typical Novice Scenario:• Account size; £5,000
• Position Size: £10 per Pip
• Risk: 30 Pip Stop Loss = £300 = 6%
• First 2 trades win for profit of 12%. Greed and overconfidence makes you increase your risk
• Next 5 trades lose at £15 per Pip = £2,250 losses
• Available Equity: £5,600 - £2,250 = £3,350
• Total Drawdown: 33%(C) Copyright 2006 Stephen Margison
www.sm-forex.com
The Forex Codes Money Management – Stop Size
• Available Equity: £5,000 £10,000• Risk: 3% = £150 3% = £300
• If your Stop Loss size is 30 Pips then the maximum trade position is
£150/30 = £5 a Pip
£300/30 = £10 a Pip
(C) Copyright 2006 Stephen Margison www.sm-forex.com
The Forex Codes Money Management – Stop Size
• The 3% rule is an absolute maximum. Professional traders use less!!
• Psychologically you can accept your losses better when they are small
(C) Copyright 2006 Stephen Margison www.sm-forex.com
The Forex Codes Leverage and Margin
• Gearing or “leverage” is the power to control a lot with just a little.
• With Forex trading $1,000 in your account can control a position value of $100,000!
(C) Copyright 2006 Stephen Margison www.sm-forex.com
The Forex Codes Leverage and Margin
• A Standard Lot - $1,000 controls $100,000. 1 pip = $10
• A Mini Lot - $100 controls $10,000. 1 pip = $1
(C) Copyright 2006 Stephen Margison www.sm-forex.com
The Forex Codes Leverage and Margin
• Margin is nothing more than the money that the broker requires you to maintain in your account before he will lend you money to trade.
• When the broker closes your trade because you don’t have enough margin the term used is a Margin Call.
(C) Copyright 2006 Stephen Margison www.sm-forex.com
The Forex Codes Money Management
• It is desirable to trade when you have a high risk to reward ratio. The higher the ratio, the less you have to be right
(C) Copyright 2006 Stephen Margison www.sm-forex.com
(C) Copyright 2006 Stephen Margison www.sm-forex.com
“IT’S TIME TO GET MORE OUT OF LIFE”
www.sm-forex.com
Money Management
