Money
Management
Most
beginning traders believe that a good entry into
the market is the key to success. Unfortunately
most are very wrong. Money Management is by far
the most important criteria of trading, whether
it’s stocks, futures or FOREX. Every successful
trader will agree that managing your trades correctly
is the #1 key to consistent profits.
7
Rules to Money Management
Money management Rule #1
NEVER,
EVER, EVER TRADE WITHOUT A STOP LOSS. Using
a Stop Loss Order is only part of what your Money
Management Strategy should be, but it is also a
very important part. A Stop Loss is a form of insurance
that you’ll be able to continue to play the
game in the event you’re wrong. It’s
insurance for the trader.
Money
Management Rule #2
Always
trade with a Risk Reward Ratio of 1 to 1.5 or higher.
Now placing a stop loss is of course very important
but placing a proper stop loss is far more important.
By this we mean, always be aware of what your Risk
Reward Ratio is. If you want to make $400.00 but
are only willing to risk $200.00, then your risk
reward ratio is 2 to 1. Let’s say you want
to be even more conservative and trade only a 1
1/2 to 1 Risk Reward Ratio. Now on the example above
you would have only netted $500.00 but you still
netted $500.00! On a $10,000 account that is 5%
of your balance. 10 trades in FOREX could simply
be 1 trade per day Monday through Friday for 2 weeks.
If you completed this for 4 weeks then you’re
looking at 10% on your money in 4 week (or 1 month).
Now I’ve been around for a long time and I’ve
never seen a Bank pay me 10% on my money for 4 weeks!
Now at 2 to 1 RRR we would be looking at 20% in
1 month without compounding.
Money
Management Rule #3
Never
over leverage* your account. Leverage is
a huge part of making money in the FOREX. No other
market in the world allows the leverage that this
incredible market offers. 100 to 1 leverage meaning
1% margin is what most Brokerages allow investors
to trade with, but it can be as high as 200 to 1
or 0.5% margin in smaller (Mini) accounts. An example
of this would be; for each $1,000 that you invest,
with 1% margin controls $100,000 worth of currency!
Think about that for a moment, it’s really
incredible! However, it also enables us to loose
some or all of our money if we trade foolishly.
Leverage is a wonderful money making tool but when
abused it can lead to financial destruction as well.
A very conservative yet very effective method of
trading is to never leverage more than 5-10% of
your account on any 1 trade. So, with $10,000 you
realistically should only trade no more than 1 Lot.
With the example we showed above, you could quickly
grow your account to a very large amount in a relatively
short amount of time. The compounding factor of
money is a very powerful thing yet due to most people's
desire to get rich quick and take unnecessary risks;
they tend to focus more on the dollar signs than
on proper trading principles. If you want to be more prudent about risk management, you can follow a few simple but effective Money Management rules. A good rule of thumb is to keep your leverage at 10% or less. More aggressive traders will trade with as high as 20% but be sure you have the money to play. If you’re starting with a mini account, start by trading only 1 position of a 10th of a lot. You are not able to make a huge amount of money, as the position sizes are only 1/10th of a normal account but the percentage of returns will quickly allow you to start trading larger sums of money.
Money
Management Rule #4
Accept
your losses. Making realistic goals is
another key factor to trading success. Don’t
expect to make a living trading right from the start.
There is a learning process that every trader goes
through to become successful. It is not only learning
to enter and exit trades correctly, but also the
process of controlling one's emotions. Many traders
make ridiculous monetary goals when they first start
trading. Make a simple goal to get started such
as making 5-10% a month or more on your account.
Now that’s realistic. Many traders do far
better than this but if you make a plan and stick
to it your rewards will typically surprise you.
You will see many times that the Premierefx Alerts
will take losses, and that’s because even
the best of professionals will taking losing trades.
The main reason we take a losing trade, is to avoid
a larger losing trade. Making in position you enter
and exit a business decision, will help you sort
the winners from the losers. Be prepared to take
losses, its part of investing.
Money
Management Rule #5
Make
realistic goals. Of course every investor
has great hopes when they start to put their money
to work that they will make a substantial return.
Many new investors do ask a very important question,
“How much money can I make and how long is
it going to take me?” The answer can actually
become quite complicated and it will vary greatly
among different skill levels of traders. Simply
put, each trader will have different experience,
risk tolerances and goals
Money
Management Rule #6
Protect
your profits. Protecting your profits is
another factor that helps to insure consistent profits.
If you’re a longer-term trader such as a Swing
Trader or Position Trader, it is important to protect
your profits by using a trailing stop loss. An example;
lets say your taking a long position (Buying) in
the USD/JPY and your looking for
a larger return than $400.00. Now let’s say
your goal is $800.00 rather than $400.00 and you’re
currently sitting at a $500.00 profit. Most professional
traders would take this opportunity to trail their
Stop Loss to at least an even position, or better
yet, to lock in a portion of these profits so that
you now have no chance of taking a loss. But remember
your goal was $800.00 or a loss of lets say $400,
a 2 to 1 RRR. Now lets assume that the market for
whatever reason starts making a large move against
your position, well if you would have protected
at least a portion of the trade or moved your stop
to Break Even position, then you would have avoided
at least 1 loss that you where not willing to risk
in the first place. More advanced methods of Stop
Loss Trailing will be covered in Exit Strategies.
Money
Management Rule #7
Always
trade with money you can afford to lose.
Trading with money you cannot afford to lose is
a very foolish thing to do, yet it is common among
the beginning traders. When trading, be sure to
trade only with money that will not affect your
lifestyle. You're trying to improve your lifestyle,
not hamper it. When a trader trades with money that
they can afford to lose, they tend to be more focused
and more disciplined. They are not worried about
any single loss. Simply, they are looking forward
to the overall return. Don’t borrow money
to trade. Don’t use your life savings. And,
don’t use the money that you would typically
use to pay your monthly bills. This is just a road
to disaster. These types of traders have the same
mentality that gamblers have. Remember this, Traders
are not Gamblers. If you must compare trading to
gambling then we could only be compared to the casino
owners, because as disciplined traders trade with
probabilities on our side. In the end, we, like
the casino owners, come out way ahead.
The hypothetical examples made above are in no way, meant to imply, assume or guarantee that any client of PremiereTrade® AI will attain or even profit in the FOREX Market. These are hypothetical examples only.
Risk
to Reward Ratio
Risk to Reward Ratio (RRR) is the idea that as part
of trading, a certain amount of capital is risked
for a greater amount to be made in reward. What
that means is that if you were to risk $1000 of
your capital, you would be planning on making a
greater amount back. This is then put into a ratio.
For example, by risking $1000 and wanting to make
$1500, the RRR is 1:1.5 ($1500 ÷ $1000 =
1.5). The same would hold true if you were risking
$5000 and wanted to make $15000, the RRR would then
be 1:3 ($15000 ÷ $5000 = 3).
Part
of Money Management, you as the trader must decide
what RRR you will use. This will largely depend
on your risk tolerance, style of trading and average
timeframe that each trade is open.
It
is recommended that you use at least a 1:1.5 ratio.
This way even if your trades become profitable 50%
of the time, overall you would still make money.
Here is how that looks:
| Risk-to-Reward
Ratio: pips |
Win
Ratio Required to Break Even |
| 40
/ 20 (2 to 1) |
67% |
| 40
/ 40 (1 to 1) |
50% |
| 40
/ 60 (1 to 1.5) |
40% |
| 40
/ 80 (1 to 2) |
33.5% |
| 60
/ 20 (3 to 1) |
75% |
| 60
/ 60 1 to 1) |
50% |
| 60
/ 90 (1 to 1.5) |
40% |
| 60
/ 120 (1 to 2) |
33.5% |
