Money Management (IV)

3 Dec

Ask yourself these questions: Are you trading Forex to make a living? Or Are you hoping to trade Forex Full Time? Or Do you  want to learn how to trade like a professional Forex trader? If the answer of any of the above question is Yes, then You Should  Care.You must have come across Brokers advertising that their Mini account competition winner made 500% in one month. If you got excited reading such advertisement then I’ve a bad news for you.  The winner of such competitions usually have multiple accounts with rather small equity in eM.M. ruleach account. They bet all or nothing and try to gamble their way to win the prize money.  Anyone who want to last long in the markets and serious about trading then he should seriously consider 3% risk rule.

Let’s talk about this rule.

The 3% Risk rule basically says that every time you place a trade you don’t risk more than 3% of your total equity. So in case you  lose then your losses should not go beyond 3% of total account equity.   Look at the image on the right to see how it is calculated.

Another important thing to note here is Risk to Reward ratio (R/R). Ideally traders look for 1:2 Risk/Reward per trade, which means that for every dollar risk your wins should be two dollars or better.  So if you take example from the image then your risk is $300 and your expected reward should be $600 or better. Now as long as your trading system gives you a Win to Loss ratio of 50% or better you would end up in profit.

3% Risk per pair.

Anyone who has been in market long enough would realise that some currency pairs move in synchronisation.  From my personal experience I’ve noticed two major Pair Types:

1. EUR/USD, GBP/USD, AUD/USD and NZD/USD  (USD/CHF and USD/CAD in reverse direction)
2. USD/JPY, EUR/JPY, AUD/JPY, NZD/JPY, CHF/JPY

What this tells me that when I am looking at opening multiple trades then I would not risk more than 3% in one set of currency pairs.  For example if I want to go long EUR/USD and AUD/USD then I would risk 1.5% of total equity on both pairs at one given time.  However if the pairs are in the different set then I would risk 3% per trade never exceeding a total of 6% risk at any given time.

Commissions and Slippage

When trading with mini lots you may not want to worry about commissions or slippage. However if you start trading anything more than 5 standard lots I would recommend to consider commission and slippage to your calculations. Commission depends on the broker you use and usually large brokers charge commission in order to provide tighter spreads.  Slippage would happen when try to execute a large order and price move before complete order is filled.  It would also depend on the time you trade and liquidity provided by your broker.

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