I'm going to share all the best money managements I know, and so are you. Ok? Let's do each other a favour to beat the banks a.k.a. forex market makers.
Let me put the fact straight. Best system will fail in long-term if it is without proper money management, and bad system can turn profitable if you put on good money management. Economy has its cycle, so do the markets and trading systems. With the right money management, you'll ride good cycles, make good profits, and skip most of the bad cycles/losses.
Ever wonder why you've made more than 500% profit so easily only to lose all of it plus principal in just a few days? Then you're trading without proper money management. You're not disciplined; therefore, all your winnings are guaranteed to lose sooner or later. It's no big deal now! Learn these money managements now and you'll keep the winnings forever.
Alexander Elder 2% and 6% Rules
You should never risk more than 2% of account equity in a single trade. This protects you from blowing up your account with just a few bad trades. If your account equity is $100,000, maximum loss of any single trade allowed is $2,000. To enforce this rule, you have to set stop loss "less than" or equal to $2,000. That is usually a stop loss of at most 200 pips for a 1-lot contract or at most 50 pips for 4-lot contract. Never let a trade lose more than $2,000!
In addition to the 2% rule, you are allowed to risk only 6% of account equity in any given month. That is $6,000 out of $100,000 equity. Any time you see drawdown of current month exceeds 6%, stop trading until first day of next month. Then you'll have another 6% to risk in the new month. Assuming account equity is $94,000 at the start of new month, you can risk only $5,640 for the rest of new month. ($5,640 is 6% of $94,000).
Note that you don't recalculate the 2% and 6% for every trade. You only need to compute them at the very beginning of the month and apply it on every trade for the rest of the month. When new month starts, note down your account equity and compute 2% and 6% of it. If your account equity was $100,000, 2% of it was $2,000, and 6% of it was $6,000. At the opening of new month if equity is down to $94,000, 2% of that is $1,880, and 6% is $5,640. Therefore, in this new month, don't lose more than $1,880 per trade or in overall don't lose more than $5,640.
These two rules will save you and your precious money during bad times, and will maximum your profits during good times. It limits the losses while letting the profit runs as much as possible. You will ride a streak of profitable trades but skip most losing trades.
Apply this money management to your trading today! Get disciplined and become professional trader.
This is taken from my
article at:
http://www.fxfisherman.com/forex/tut...gement-part-1/