Money Management “IT’S TIME TO GET MORE OUT OF LIFE”
www.sm-forex.com
(C) Copyright Forex Education Ltd 2006
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 Forex Education Ltd 2006
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 Forex Education Ltd 2006
The Forex Codes Money Management
(C) Copyright Forex Education Ltd 2006
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 Forex Education Ltd 2006
The Forex Codes Money Management - Drawdown
(C) Copyright Forex Education Ltd 2006
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 Forex Education Ltd 2006
The Forex Codes Money Management – Stop Size • Available Equity: • Risk:
£5,000 3% = £150
£10,000 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 Forex Education Ltd 2006
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 Forex Education Ltd 2006
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 Forex Education Ltd 2006
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 Forex Education Ltd 2006
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 M ar gin Call.
(C) Copyright Forex Education Ltd 2006
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 Forex Education Ltd 2006
Money Management “IT’S TIME TO GET MORE OUT OF LIFE”
www.sm-forex.com
(C) Copyright Forex Education Ltd 2006