Forex Trading Course: Chapter 10: Forex Money Management Plan
Trading forex requires a sound money management plan and a low risk to reward ratio. This Money Management Plan will not only benefit your news trading, but by applying it to all your trading decisions, you will see a significant increase in both profit and consistency.
The first rule in money management is to protect your money. If you take unnecessary risks all the time, you will lose your entire account. The first step is to determine your leverage and your lot size.
Your maximum leverage should not be more than 8 times of your available deposit amount. I know some brokers will offer you a 200:1 or even 400:1 leverage, but if you are not using it fully, it doesn’t really benefit you. If you were to use a 400:1 leverage on a $25,000 account fully, you would have to trade 100 standard lots. No one in their right mind will trade 100 standard lots using a 400:1 leverage. Every pip will either make you $1,000 or cost you $1,000, and you will be paying $3,000 in spread cost just to get in on a trade.
On a side note: Most brokers offering 200:1 or 400:1 accounts are secretly hoping and wishing that you over-leverage your account. They may have a dealing desk trading against you, and it is just a matter of time before you get margined out… They have a license to rob you blind…legally.
Remember that trading Forex is similar to, in many ways, betting in a casino. The house will always win. If you use a sound money management plan, you will stay long enough to catch the big moves and make some real money, whereas people who over-leverage their accounts won’t have the chance.
Therefore, if you have a $25,000 account, you should trade no more than 8 times your money, which is $200,000, or 2 standard lots. If you were trading a currency pair that requires more margins, then you should only trade 1 standard lot per every $25,000.
You should also put a limit to your daily loss to no more than 2% of your account. In our case of $25,000 account, you should not lose more than $500 per day. That is 25 pips per lot if you trade 2 lots, or 50 pips if you trade 1 lot.
In the case of trading fundamental news, I would suggest that you divide your total trading lots to 2. Using our $25,000 example, you would trade 1 Lot per trade up to 2 trades at a time.
No matter how many lots that you trade, the basic rules of order management is simple. You want to lock in your profit and never let a winning trade go negative on you. Our news trades are considered successful once it reaches 15 pips of profit; therefore there is absolutely no reason why after a 15 pips of profit you would still let the trade go negative on you. Always move your stop to breakeven or lock in 1 pip of profit when you are up to 15 pips.
Once you get 20 pips of profit, close 50% of your position guaranteeing you a profit, and leave the stop/loss at either breakeven or 1 pip profit, and let the market ride. 75% of the time you will end up with 1 pip or breakeven, but the other 25% of the time you will end up winning 50, 100, or even 200 pips.
Once you have taken profit on the first 50% of your position and lock in your remaining 50% with profit, you are no longer risking any capital. It will no longer count as part of your leverage. You may take on other trades.
For example, you Bought 1 Lot of EUR/USD and Sold 1 lot of USD/CHF, and you have taken 20 pips profit on both with 0.5 Lots and still have 0.5 Lots USD/CHF and EUR/USD riding the market, you are free to trade 2 more lots since you are not risking anything with your current open trades.
Another important aspect to money management is your daily goals. Set realistic goals by looking at your monthly target. If you have a $25000 account and you would like to make 20% return per month, or $5000, you need to generate about $250 per day. That’s 25 pips of profit on 1 lot. Therefore, if you are trading 1 lot per currency pair, you would stop trading for the day once you have 2 successful trades. Of course if you follow the 50% rule with the order management, you could make more, without taking additional risk.
Another important aspect to money management is your daily goals. Set realistic goals by looking at your monthly target. If you have a $25000 account and you would like to make 20% return per month, or $5000, you need to generate about $250 per day. That’s 25 pips of profit on 1 lot. Therefore, if you are trading 1 lot per currency pair, you would stop trading for the day once you have 2 successful trades. Of course if you follow the 50% rule with the order management, you could make more, without taking additional risk.
Your goals will determine your risk factor. If you plan to make 50% return on your account per month, be prepared to lose up to 50% of your account. A realistic number will be anywhere from 5% to 25% of the account. Anything above that is too risky. Trading is a business, and to run a successful business you need capital. If you only have $5000, don’t expect to make $10,000 by the end of the month. Go for something more realistic like $1,000 or even $1,200, but never expect to double or triple your account size.
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