Let’s start with a controversial statement; Money management strategy is far more important to your success as a trader than is trade entry strategy. Everyone is looking for the “holy grail” trade entry strategy where price will go straight from the entry to the target in five minutes.But in truth, your management of the trade is at least equally as important to being a profitable trader.
In addition, your first job as a trader MUST be to protect your account, or you will no longer have a job as a trader – you won’t have the account to trade.
How Do I Manage My Money?
To manage your trading business, you will have to start with a trading plan. No seasoned business person would even consider starting a business without a business plan. Your trading should be treated as a business and should start with a good solid business plan. We will be having an Advanced Training session on Trading Plans at some point in the future. In the meantime, we have several resources to help you develop a trading plan which must include the following:
- Where I will get my trading account money
- What broker(s) I will use for my trading
- What percentage of my account I am willing to risk on each trade
- What instruments will I trade
- What strategies I will use to make trade entries
- What strategies I will use to close losing positions
- What strategies I will use to close winning positions
- When I will remove profits from my account
- What I will do with the profits that I remove from the account
- What professional development training you will participate in and when
The complete trading plan is beyond the scope of this training. We will focus here on one of the trading plan points, specifically what percentage risk will I use. We will discuss how to determine your risk for each trade and how you can control it.
Why Is Risk Control So Important?
A large portion of managing your money as a trader is to manage your risk in your trades. If you don’t manage your risk, you can quickly blow out your whole trading account. That’s not a pleasant prospect. So managing the amount of risk on every trade is of paramount importance. No trade is more “sure” than any other trade. The market is unpredictable and can move in any direction at any given time. So you must be sure that you have locked your risk down so you can’t lose more than your prescribed amount on a given trade.
How Do I Control Risk in my Trading
As I mentioned, you have to determine what your per-trade risk amount will be. It can be expressed as a percentage of your account (so it grows with your account) or as a fixed dollar (euro, pound, franc, etc.) amount. There are other ways to fix your per-trade risk, but those are beyond the scope of this training. For our purposes, I recommend using a percentage of your account as your per-trade risk. Typically you will want to use some percentage less than 5%, 1-2% would be ideal. This will help keep your trade-size small and allow you to be objective in your trading without emotion entering into the picture. In other words, it will be easier to cut loose a non-performing trade without regard to the profit or loss.
Stop Loss Placement
Your first job is deciding where you will put your stop loss. You may be trading a system that already tells you where your stop loss should be. If not, you will have to find a good place for it. I like to find a support or resistance level that is near the number of pips swing that I want to give my trade. Look for a moving average, swing high or low, a psychological level (any price with a zero in the singles column – the more zeros, the better), a Fibonacci level or something else. Then place your stop loss a few pips behind that level – so the trade has to do the work of overcoming that level before it hits your stop loss.
How Do I Calculate The Trade Risk
Once you’ve decided where you want to place your stop loss, you can determine the size of your position that will maintain your risk profile. After you determine the number of pips you will be risking if the trade goes the wrong way, you can plug that into a trade size calculator to determine what your trade size should be. As I use MyFXBook to track my account, I like their Position Size Calculator to calculate my trade sizes. It would be nice if it would calculate split sizes but that must be done manually.