Money managementBy tradingshop
Published: March 23, 2008
Money Management and leverage, stop losses and targets
This is one of the most important and most overlooked parts of trading. Many traders take huge risks with their capital in the hope that they will “get rich quickly” or recover previous losses with one good trade. I would like to suggest some simple guidelines for managing your trading account with the Expert Forex Systems, which will help you to reduce risk and maximize returns.
1. Never leverage more than 5:1
This means that for every dollar in your account, you should not trade more than 5 dollars per trade positions. For example, if your account size is $5000, you should trade no more than $25000 per position. This is 2.5 mini lots (a mini lot is worth $10,000) For example, with a standard account ($100k lot size), you should have at least $20k in your account to trade one standard lot of $100k.
* I prefer to leverage even lower than 5:1 with 1:1 – 2:1 beingoptimal.
2. Never risk more than 2% of your account on 1 trade.
* This is easily calculated. If the trade you want to enter requires a 40 pip stop loss for example, the risk to your account if stopped out is 40 pips x leverage/100%. In this case, if your leverage is 5:1 then the risk would be 40×5/100 = 2%. If the stop loss is higher, the leverage would have to be reduced.
3. Always aim for a 2:1 reward/risk ratio in your trades.
* If you are prepared to risk say 40 pips on a trade, ensure that the potential target for the trade is at least 80 pips. If you areprepared to risk 50 pips, make sure you have a possibletarget of 100 pips, and so on. Try to always aim for twice asmuch as you risk. The only exception to this rule is found inthe Power Break™ method, and this will be clarified in thatsection.
If you stick to these simple rules, you should be able to weather the storms and have a long lasting and relatively stress free Forex career! Good luck and enjoy! - 8803 Views
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