Forex Trading Money Management – An EYE OPENING Article
An Eye-Opening Article on Forex Trading Money Management
This
post was written to expose some truths and some myths surrounding the
topic of managing your trading capital. Most information out there on
money management is completely useless in my opinion and will not work
well in professional trading. What most traders are taught about money
management is usually ‘lies’ invented by the industry to help you lose
your money “slower” so that brokers can make more commission / spreads
from you. If your using the 2% money management rule,
this article may put that theory into question, which is the point… to
make you think about it from all angles and perspectives. I also believe
that people who teach the ‘percentage of account’ risk management
method don’t truly understand how arbitrary this idea is. The reason is
simple… every traders account size will be different and every persons
risk profile, net worth and skill level is different. If you simply take
a percentage of money that is in your trading account to risk on each
trade, it’s purely arbitrary. What you are prepared to lose or risk on
each trade is much more complex than just plucking 2% or 4 % or 10% out
of thin air. Let me explain…
I will warn you that what you are about to read is likely to be contradictory to what you may have already learned about forex money management and risk control in other places. I can only tell you that what am I about to divulge to you is the way I trade and it is the way many professional forex traders manage capital. So get ready, open your mind, and enjoy this article on how to effectively grow your trading account by effectively managing your money. Just remember, everything I talk about on this website is based on real world application, not recycled theory.
Everyone knows that money management is a crucial aspect of successful forex trading. Yet most people don’t spend nearly enough time concentrating on developing or implementing a money management plan. The paradox of this is that until you develop your money management skills and consistently utilize them on every single trade you execute, you will never be a consistently profitable trader.
I want to give you a professional perspective on money management and dispel some common myths floating around the trading world regarding the concept of money management. We hear many different ideas about risk control and profit taking from various sources, much of this information is conflicting and so it is not surprising that many traders get confused and just give up on implementing an effective forex money management plan, which of course ultimately leads to their demise. I have been successfully trading the financial markets for nearly a decade and I have mastered the skill of risk reward and how to effectively utilize it to grow small sums of money into larger sums of money relatively quickly.
Money Management Myths:
Myth 1: Traders should focus on pips.
You may have heard that you should concentrate on pips gained or lost instead of dollars gained or lost. The rationale behind this money management myth is that if you concentrate on pips instead of dollar you will somehow not become emotional about your trading because you will not be thinking about your trading account in monetary terms but rather as game of points. If this doesn’t sound ridiculous to you, it should. The whole point of trading and investing is to make money and you need to be consciously aware of how much money you have at risk on each and every trade so that the reality of the situation is effectively conveyed. Do you think business owners treat their quarterly profit and loss statements as a game of points that is somehow detached from the reality of making or losing real money? Of course not, when you think about it these terms it seems silly to treat your trading activities like a game. Trading should be treated as a business, because that’s what it is, if you want to be consistently profitable you need to treat each trade as a business transaction. Just as any business transaction has the possibility of risk and of reward, so does every trade you execute. The bottom line is that thinking about your trades in terms of pips and not dollars will effectively make trading seem less real and thus open the door for you treat it less seriously than you otherwise would.
From a Mathematical standpoint, thinking of trading in terms of “how many pips you lose or gain” is completely irrelevant. The problem is that each trader will trade a different position size, thus, we must define risk in terms of “Ddollars at risk or dollars gained”. Just because you risk a large amount of pips, does not mean you are risking a large amount of your capital, such is the case that if you have a tight stop this does not mean your risking a small amount of capital.
Myth 2: Risking 1% or 2% on every trade is a good way to grow your account
This is one of the more common money management myths that you are likely to have heard. While it sounds good in theory, the reality is that the majority if retail forex traders are starting with a trading account that has $5,000 in it or less. So to believe that you will grow your account effectively and relatively quickly by risking 1% or 2% per trade is just silly. Say you lose 5 trades in a row, if you were risking 2% your account is now down to $4,519.60, now you are still risking 2% per trade, but that same 2% is now a smaller position size than it was when your account was at $5,000.
Thus, in the % risk model, as you lose trades you automatically reduce your position size. Which is not always the best course of action. There’s psychological evidence that suggests it’s human nature to become more risk averse after a series of losing trades and less risk averse after a series of winning trades, but that doesn’t mean the risk of any one trade becomes more or less simply because you lost or won on your previous trade. As we can see in my article on randomly distributed trading results, your previous trade’s results don’t mean anything for the outcome of your next trade.
What ends up happening when traders use the % risk model is that they start off good, they risk 1 or 2% on their first few trades, and maybe they even win them all. But once they begin to hit a string of losers, they realize that all of their gains have been wiped out and it is going to take them quite a long time just to make back the money they have lost. They then proceed to OVER-TRADE and take less than quality setups because they now realize how long it will take them just to get back to break even if they only risk 1% to 2% per trade.
So, while this method of money management will allow you to risk small amounts on each trade, and therefore theoretically limit your emotional trading mistakes, most people simply do not have the patience to risk 1 or 2% per trade on their relatively small trading accounts, it will eventually lead to over-trading which is about the worst thing you can do for your bottom line. It is also a difficult task to recover from a drawn down period. Remember, once you drawn down, using a 2 % per trade method, your risk each trade will be smaller, there fore, your rate of recovery on profits is slower and hinders the traders effort.
The Most important fact is this.. if you start with $10,000 , and drawn down to $5,000, using a fixed % method, it will take you “much longer” to recover because you started out risking 2% per trade which was $200, but at the $5,000 draw-down level, your only risking $100 per trade, so even if you have a good winning streak, your capital is recovering at “half the rate” it would using “fixed $ per trade risk.
Myth 3: Wider stops risk more money than smaller stops
Many traders erroneously believe that if they put a wider stop loss on their trade they will necessarily increase their risk. Similarly, many traders believe that by using a smaller stop loss they will necessarily decrease the risk on the trade. Traders that are holding these false beliefs are doing so because they do not understand the concept of Forex position sizing.
Position sizing is the concept of adjusting your position size or the number of lots you are trading, to meet your desired stop loss placement and risk size. For example, say you risk $200 per trade, with a 100 pip stop loss you would trade 2 mini-lots: $2 per pip x 100 pips = $200.
Now let’s you want to trade a pin bar forex strategy but the tail is exceptionally long but you would still like to place your stop above the high of the tail even though it will mean you have a 200 pip stop loss. You can still risk the same $200 on this trade, you just need to adjust your position size down to meet this wider stop loss, and you would adjust the position down to 1 mini-lot rather than 2. This means you can risk the same amount on every trade simply by adjusting your position size up or down to meet your desired stop loss width.
Let’s now look at an example of what can happen if you don’t practice position sizing effectively by failing to decrease the number of lots you are trading while increasing stop loss distance.
Example: Two traders risk the same amount of lots on the same trade setup. Forex Trader A risks 5 lots and has a stop loss of 50 pips, Trader B also risks 5 lots but has a stop loss of 200 pips because he or she believes there is an almost 100% chance that the trade will not go against him or her by 200 pips. The fault with this logic is that typically if a trade begins to go against you with increasing momentum, there theoretically is no limit to when it may stop. And we all know how strong the trends can be in the forex market. Trader A has gotten stopped out with his or her pre-determined risk amount of 5 lots x 50 pips which is a loss of $250. Trader B also got stopped out but his or her loss was much larger because they erroneously hoped that the trade would turn around before moving 200 pips against them. Trader B thus losses 5 lots x 200 pips, but their loss is now a whopping $1,000 instead of the $250 it could have been.
We can see from this example why the belief that just widening your stop loss on a trade is not an effective way to increase your trading account value, in fact it is just the opposite; a good way to quickly decrease your trading account value. The fundamental problem that afflicts traders who harbor this believe is a lack of understanding of the power of risk to reward and position sizing.
The Power of Risk to Reward
Professional traders like me and many others concentrate on risk to reward ratios, and not so much on over analyzing the markets or having unrealistically wide profit targets. This is because professional traders understand that trading is a game of probabilities and capital management. It begins with having a definable market edge, or a trading method that is proven to be at least slightly better than random at determining market direction. This edge for me has been price action analysis. The price action trading strategies that I teach and use can have an accuracy rate of upwards of 70-80% if they are used wisely and at the appropriate times.
The power of risk to reward comes in with its ability to effectively and consistently build trading accounts. We all hear the old axioms like “let your profits run” and “cut your losses early”, while these are well and fine, they don’t really provide any useful information for new traders to implement. The bottom line is that if you are trading with anything less than about $25,000, you are going to have to take profits at pre-determined intervals if you want to keep your sanity and your trading account growing. Entering trades with open profit targets typically doesn’t work for smaller traders because they end up never taking the profits until the market comes swinging back against them dramatically. (I think this is very important, go back an re read that last sentence)
If you know your strike rate is between 40-50% than you can consistently make money in the market by implementing simple risk to reward ratios. By learning to use well-defined price action setups to enter your trades you should able to win a higher percentage of your trades, assuming you TAKE profits.
Let’s Compare 2 Examples – One Trader Using the 2 % Rule, and one Trader using Fixed $ Amount.
Example 1 – -you have a risk to reward ratio of 1:3 on every trade you take. This means you will make 3 times your risk on every trade that hits your target, if you win on only 50% of your trades, you will still make money:
Let’s say your trading account value is $5,000 and you risk $200 per trade.
You lose your 1st trade = $5,000-$200 = $4,800,
You lose your 2nd trade = $4,800-$200 = $4,600,
You win your 3rd trade = $4,600+$600 = $5,200
You win your 4th trade = $5,200+$600 = $5,800
From this example we can see that even losing 2 out of every 4 trades you can still make very decent profits by effectively utilizing the power of risk to reward ratios. For comparison purposes, let’s look at this same example using the 2% per trade risk model:
Example 2 – Once again, your trading account value is $5,000 but you are now risking 4% per trade (so that both examples start out with a risk of $200 per trade) : Remember, you have a risk to reward ratio of 1:3 on every trade you take. This means you will make 3 times your risk on every trade that hits your target, if you win on only 50% of your trades, you will still make money:
You lose your 1st trade = $5,000 – $200 = $4800
You lose your 2nd trade = $4800 – $192 = $4608
You win your 3rd trade = $4608 + $552 = $5160
You win your 4th trade = $5160 + $619 = $5780
Now we can see why risking 4% (or 2% etc) of your account on each trade is not as efficient as the trader using the fixed $ amount. Important to note that after 4 trades, risking the same dollar amount per trade and effectively utilizing a risk to reward ratio of 1:3, using fixed $ risk per trade, the first traders account is now up by $800 versus $780 on the %4 risk account.
Now, If the trader using % risk rule had a draw down period and lost 50% of their account, they effectively have to make back 100% of their capital to be back at break even, now, this may also be so for the trader using the fixed $ risk method, but which trader do you think has the best chance of recovering? Seriously, it could take a very long time to recover from a drawn down using the % risk method. Sure, some will argue that you can drawn down heavier and its more risky to use the fixed $ method, but we are talking about real world trading here, I need to use a method that gives me a chance to recover from losses, not just protect me from losses. With a good trading method and experience, you can use the fixed $ method, which is why I wanted to open your eyes to it.
In Summary
The power of the money management techniques discussed in this article lies in their ability to consistently and efficiently grow your trading account. There are some underlying assumptions with these recommendations however, mainly that you are trading with money you have no other need for, meaning your life will not be directly impacted if you do lose it all. You also must keep in mind that the whole idea of risk to reward strategies revolves around having an effective edge in the market and knowing when that edge is present and how to use it, you can learn this from my price action forex trading course.
While I do not recommend traders use a set risk percentage per trade, I do recommend you risk an amount you are comfortable with; if your risk is keeping you up at night than it is probably too much. If you have $10,000 you may risk something like $200 or $300 per trade.. as a set amount, or whatever your are comfortable with, it may be a lot less, but it will be constant. Also remember, Professional traders have learned to judge their setups based on the quality of the setup, otherwise known as discretion. This comes through screen time and practice, as such; you should develop your skills on a demo account before switching to real money. The money management strategy discussed in this article provides a realistic way to effectively grow your account without evoking the feeling of needing to over-trade which so often happens to traders who practice the % risk method of forex money management. Learn to use my price action strategies with the power of risk to reward ratios and your trading results will begin to turn around.
This
post was written to expose some truths and some myths surrounding the
topic of managing your trading capital. Most information out there on
money management is completely useless in my opinion and will not work
well in professional trading. What most traders are taught about money
management is usually ‘lies’ invented by the industry to help you lose
your money “slower” so that brokers can make more commission / spreads
from you. If your using the 2% money management rule,
this article may put that theory into question, which is the point… to
make you think about it from all angles and perspectives. I also believe
that people who teach the ‘percentage of account’ risk management
method don’t truly understand how arbitrary this idea is. The reason is
simple… every traders account size will be different and every persons
risk profile, net worth and skill level is different. If you simply take
a percentage of money that is in your trading account to risk on each
trade, it’s purely arbitrary. What you are prepared to lose or risk on
each trade is much more complex than just plucking 2% or 4 % or 10% out
of thin air. Let me explain…I will warn you that what you are about to read is likely to be contradictory to what you may have already learned about forex money management and risk control in other places. I can only tell you that what am I about to divulge to you is the way I trade and it is the way many professional forex traders manage capital. So get ready, open your mind, and enjoy this article on how to effectively grow your trading account by effectively managing your money. Just remember, everything I talk about on this website is based on real world application, not recycled theory.
Everyone knows that money management is a crucial aspect of successful forex trading. Yet most people don’t spend nearly enough time concentrating on developing or implementing a money management plan. The paradox of this is that until you develop your money management skills and consistently utilize them on every single trade you execute, you will never be a consistently profitable trader.
I want to give you a professional perspective on money management and dispel some common myths floating around the trading world regarding the concept of money management. We hear many different ideas about risk control and profit taking from various sources, much of this information is conflicting and so it is not surprising that many traders get confused and just give up on implementing an effective forex money management plan, which of course ultimately leads to their demise. I have been successfully trading the financial markets for nearly a decade and I have mastered the skill of risk reward and how to effectively utilize it to grow small sums of money into larger sums of money relatively quickly.
Money Management Myths:
Myth 1: Traders should focus on pips.
You may have heard that you should concentrate on pips gained or lost instead of dollars gained or lost. The rationale behind this money management myth is that if you concentrate on pips instead of dollar you will somehow not become emotional about your trading because you will not be thinking about your trading account in monetary terms but rather as game of points. If this doesn’t sound ridiculous to you, it should. The whole point of trading and investing is to make money and you need to be consciously aware of how much money you have at risk on each and every trade so that the reality of the situation is effectively conveyed. Do you think business owners treat their quarterly profit and loss statements as a game of points that is somehow detached from the reality of making or losing real money? Of course not, when you think about it these terms it seems silly to treat your trading activities like a game. Trading should be treated as a business, because that’s what it is, if you want to be consistently profitable you need to treat each trade as a business transaction. Just as any business transaction has the possibility of risk and of reward, so does every trade you execute. The bottom line is that thinking about your trades in terms of pips and not dollars will effectively make trading seem less real and thus open the door for you treat it less seriously than you otherwise would.
From a Mathematical standpoint, thinking of trading in terms of “how many pips you lose or gain” is completely irrelevant. The problem is that each trader will trade a different position size, thus, we must define risk in terms of “Ddollars at risk or dollars gained”. Just because you risk a large amount of pips, does not mean you are risking a large amount of your capital, such is the case that if you have a tight stop this does not mean your risking a small amount of capital.
Myth 2: Risking 1% or 2% on every trade is a good way to grow your account
This is one of the more common money management myths that you are likely to have heard. While it sounds good in theory, the reality is that the majority if retail forex traders are starting with a trading account that has $5,000 in it or less. So to believe that you will grow your account effectively and relatively quickly by risking 1% or 2% per trade is just silly. Say you lose 5 trades in a row, if you were risking 2% your account is now down to $4,519.60, now you are still risking 2% per trade, but that same 2% is now a smaller position size than it was when your account was at $5,000.
Thus, in the % risk model, as you lose trades you automatically reduce your position size. Which is not always the best course of action. There’s psychological evidence that suggests it’s human nature to become more risk averse after a series of losing trades and less risk averse after a series of winning trades, but that doesn’t mean the risk of any one trade becomes more or less simply because you lost or won on your previous trade. As we can see in my article on randomly distributed trading results, your previous trade’s results don’t mean anything for the outcome of your next trade.
What ends up happening when traders use the % risk model is that they start off good, they risk 1 or 2% on their first few trades, and maybe they even win them all. But once they begin to hit a string of losers, they realize that all of their gains have been wiped out and it is going to take them quite a long time just to make back the money they have lost. They then proceed to OVER-TRADE and take less than quality setups because they now realize how long it will take them just to get back to break even if they only risk 1% to 2% per trade.
So, while this method of money management will allow you to risk small amounts on each trade, and therefore theoretically limit your emotional trading mistakes, most people simply do not have the patience to risk 1 or 2% per trade on their relatively small trading accounts, it will eventually lead to over-trading which is about the worst thing you can do for your bottom line. It is also a difficult task to recover from a drawn down period. Remember, once you drawn down, using a 2 % per trade method, your risk each trade will be smaller, there fore, your rate of recovery on profits is slower and hinders the traders effort.
The Most important fact is this.. if you start with $10,000 , and drawn down to $5,000, using a fixed % method, it will take you “much longer” to recover because you started out risking 2% per trade which was $200, but at the $5,000 draw-down level, your only risking $100 per trade, so even if you have a good winning streak, your capital is recovering at “half the rate” it would using “fixed $ per trade risk.
Myth 3: Wider stops risk more money than smaller stops
Many traders erroneously believe that if they put a wider stop loss on their trade they will necessarily increase their risk. Similarly, many traders believe that by using a smaller stop loss they will necessarily decrease the risk on the trade. Traders that are holding these false beliefs are doing so because they do not understand the concept of Forex position sizing.
Position sizing is the concept of adjusting your position size or the number of lots you are trading, to meet your desired stop loss placement and risk size. For example, say you risk $200 per trade, with a 100 pip stop loss you would trade 2 mini-lots: $2 per pip x 100 pips = $200.
Now let’s you want to trade a pin bar forex strategy but the tail is exceptionally long but you would still like to place your stop above the high of the tail even though it will mean you have a 200 pip stop loss. You can still risk the same $200 on this trade, you just need to adjust your position size down to meet this wider stop loss, and you would adjust the position down to 1 mini-lot rather than 2. This means you can risk the same amount on every trade simply by adjusting your position size up or down to meet your desired stop loss width.
Let’s now look at an example of what can happen if you don’t practice position sizing effectively by failing to decrease the number of lots you are trading while increasing stop loss distance.
Example: Two traders risk the same amount of lots on the same trade setup. Forex Trader A risks 5 lots and has a stop loss of 50 pips, Trader B also risks 5 lots but has a stop loss of 200 pips because he or she believes there is an almost 100% chance that the trade will not go against him or her by 200 pips. The fault with this logic is that typically if a trade begins to go against you with increasing momentum, there theoretically is no limit to when it may stop. And we all know how strong the trends can be in the forex market. Trader A has gotten stopped out with his or her pre-determined risk amount of 5 lots x 50 pips which is a loss of $250. Trader B also got stopped out but his or her loss was much larger because they erroneously hoped that the trade would turn around before moving 200 pips against them. Trader B thus losses 5 lots x 200 pips, but their loss is now a whopping $1,000 instead of the $250 it could have been.
We can see from this example why the belief that just widening your stop loss on a trade is not an effective way to increase your trading account value, in fact it is just the opposite; a good way to quickly decrease your trading account value. The fundamental problem that afflicts traders who harbor this believe is a lack of understanding of the power of risk to reward and position sizing.
The Power of Risk to Reward
Professional traders like me and many others concentrate on risk to reward ratios, and not so much on over analyzing the markets or having unrealistically wide profit targets. This is because professional traders understand that trading is a game of probabilities and capital management. It begins with having a definable market edge, or a trading method that is proven to be at least slightly better than random at determining market direction. This edge for me has been price action analysis. The price action trading strategies that I teach and use can have an accuracy rate of upwards of 70-80% if they are used wisely and at the appropriate times.
The power of risk to reward comes in with its ability to effectively and consistently build trading accounts. We all hear the old axioms like “let your profits run” and “cut your losses early”, while these are well and fine, they don’t really provide any useful information for new traders to implement. The bottom line is that if you are trading with anything less than about $25,000, you are going to have to take profits at pre-determined intervals if you want to keep your sanity and your trading account growing. Entering trades with open profit targets typically doesn’t work for smaller traders because they end up never taking the profits until the market comes swinging back against them dramatically. (I think this is very important, go back an re read that last sentence)
If you know your strike rate is between 40-50% than you can consistently make money in the market by implementing simple risk to reward ratios. By learning to use well-defined price action setups to enter your trades you should able to win a higher percentage of your trades, assuming you TAKE profits.
Let’s Compare 2 Examples – One Trader Using the 2 % Rule, and one Trader using Fixed $ Amount.
Example 1 – -you have a risk to reward ratio of 1:3 on every trade you take. This means you will make 3 times your risk on every trade that hits your target, if you win on only 50% of your trades, you will still make money:
Let’s say your trading account value is $5,000 and you risk $200 per trade.
You lose your 1st trade = $5,000-$200 = $4,800,
You lose your 2nd trade = $4,800-$200 = $4,600,
You win your 3rd trade = $4,600+$600 = $5,200
You win your 4th trade = $5,200+$600 = $5,800
From this example we can see that even losing 2 out of every 4 trades you can still make very decent profits by effectively utilizing the power of risk to reward ratios. For comparison purposes, let’s look at this same example using the 2% per trade risk model:
Example 2 – Once again, your trading account value is $5,000 but you are now risking 4% per trade (so that both examples start out with a risk of $200 per trade) : Remember, you have a risk to reward ratio of 1:3 on every trade you take. This means you will make 3 times your risk on every trade that hits your target, if you win on only 50% of your trades, you will still make money:
You lose your 1st trade = $5,000 – $200 = $4800
You lose your 2nd trade = $4800 – $192 = $4608
You win your 3rd trade = $4608 + $552 = $5160
You win your 4th trade = $5160 + $619 = $5780
Now we can see why risking 4% (or 2% etc) of your account on each trade is not as efficient as the trader using the fixed $ amount. Important to note that after 4 trades, risking the same dollar amount per trade and effectively utilizing a risk to reward ratio of 1:3, using fixed $ risk per trade, the first traders account is now up by $800 versus $780 on the %4 risk account.
Now, If the trader using % risk rule had a draw down period and lost 50% of their account, they effectively have to make back 100% of their capital to be back at break even, now, this may also be so for the trader using the fixed $ risk method, but which trader do you think has the best chance of recovering? Seriously, it could take a very long time to recover from a drawn down using the % risk method. Sure, some will argue that you can drawn down heavier and its more risky to use the fixed $ method, but we are talking about real world trading here, I need to use a method that gives me a chance to recover from losses, not just protect me from losses. With a good trading method and experience, you can use the fixed $ method, which is why I wanted to open your eyes to it.
In Summary
The power of the money management techniques discussed in this article lies in their ability to consistently and efficiently grow your trading account. There are some underlying assumptions with these recommendations however, mainly that you are trading with money you have no other need for, meaning your life will not be directly impacted if you do lose it all. You also must keep in mind that the whole idea of risk to reward strategies revolves around having an effective edge in the market and knowing when that edge is present and how to use it, you can learn this from my price action forex trading course.
While I do not recommend traders use a set risk percentage per trade, I do recommend you risk an amount you are comfortable with; if your risk is keeping you up at night than it is probably too much. If you have $10,000 you may risk something like $200 or $300 per trade.. as a set amount, or whatever your are comfortable with, it may be a lot less, but it will be constant. Also remember, Professional traders have learned to judge their setups based on the quality of the setup, otherwise known as discretion. This comes through screen time and practice, as such; you should develop your skills on a demo account before switching to real money. The money management strategy discussed in this article provides a realistic way to effectively grow your account without evoking the feeling of needing to over-trade which so often happens to traders who practice the % risk method of forex money management. Learn to use my price action strategies with the power of risk to reward ratios and your trading results will begin to turn around.
Thank you very much for your answer.
You can begin with the 2% rule at start of your trading and keep that as your dollar risk whether the account grows or not. Forexample, if you start with $1000, your dollar risk will be $20 per trade even though the account falls to $800. If your account grows, then you can compute the new 2% of your new grown account balance and make it your constant dollar risk. That is the only way to recover from your drawdowns. If you have mastered your trading edge with proper risk:reward ratio, then recovery should be easier and faster
Having said that, it is equally important to note that Forex trading is a business and the sole aim of every business venture is to make money. If your goal is to master the game and make money like a pro, then give attention to what Niel teaches because his goal is to make his readers and students professionals like himself.
This dollar risk value is used to determine my position size based on the chart defined stop loss.
As my account grows (or falls) my emotional dollar limit may change or remain the same based on the overall chart pattern, market conditions, and my psychology at the time. What is important is that I am comfortable enough with that figure that I do NOT interfere with the trade once filled.
There is only ONE time in a trade that you can control risk; that’s before you enter it. After you enter a trade the best you can do is manage or shift the risk; you cannot control it.
thanks nial
I respect your comments and opinions, however I think you may have mis understood the concepts of % risk vs fixed $ risk that I am trying to explain. There is no perfect way to compare % risk vs $ risk money management. I use the fixed $ risk, whilst others have their own opinions.
thanx.
great work nial. keep it up.
The strong point of a fixed dollar trading is effective trading system. Everyone who will prefer this way should ensure they learn this price action strategy effectively.
Remember $200 is 4% of $5000 and risking 4% with a good method will always be better than 2%.
i continued your trading analogy and realize that after 75 trades, the 2% method started paying off better, though it started slow but after about 75 trades, it came off better than the $200 fixed.
My conclusion was one will need to shift the goal post from $200 to higher fixed dollar, like once your account gets to $10000, you change from $200 to $400. that is the only way you can continue to beat the 2% rule.
2% rule is still reasonable and commendable for beginners, it will help their psychological state of mind, that which separates professional from amateurs.
if you are an amateur that uses the fixed dollar system like
the $200 for $5000 of the analogue above, a losing streak of about 25 trades will wipe you account out.
if you use the 2% rule, you will need losing streak of about
400 trades to wipe your account out. which of the 2 is more likely.
Trading is different for everyone, it is important to attain some level of expertise before you make certain decisions
Remember here that Nial said that is the way he trades, he is a professional, and he expects you to have mastered the price action VERY WELL to follow this model.
Thank you Nial
I eventually thought yeh.. He must know what he’s talking about since he have read and seen many “pro” articles and seminars.
I will direct that person that believe the 2% rule to be a realistic approach to this article because I believe this great article.
Thanks Nial. Your article has confirmed my sanity that I was not the only one in the world who believes the 2% rule is not practical. Im just starting out now in forex. Luckily I came across your site. Cheers
Just a quick observation (based on successful long-term demo trading)…What you say about discretion regarding trade setups can be applied to discretion regarding risk:reward.
i.e Cutting losing trades short because the price is moving sideways can save a fortune as against hoping and waiting for the market to move, then its time to walk away and come back later on in the day or next day.
I’m very new to the trading game & haven’t even placed a trade as yet, still gathering information. I must say though this is a brilliant explanation on risk and reward. Clear, Concise & commonsense. Thank you so much Niall, excellent advice & easy to understand even for a begginer. :-))
So I guess the amount you put on your account is not directly correlated with your gains.
The most important aspect is the amount your risk.
The size off your account only allows you to lose more trades before being “ruined”.
I really like your articles. Very clear although I’m not a natural born english speaker!
In your example, you use a $5000 account, but you “only” risk $200 per trade.
Wouldn’t it be simpler to put $200 on your account, and refill it everytime you lose?
Thanks!
I love your site. keep up the good work!
thanks Nial.
Like Frank ( above – May 24th 2010) I like to move my stop to a break even position if a position achieves a profit level equal to the amount of risk originally taken, as I feel more comfortable protecting my capital with this approach. I do appreciate that I’m increasing my chances of being stopped out and therefore reducing my chances of hitting my 2X or more reward target, but am not psychologically strong enough to follow through that far at the moment!
Thanks for your shareing the acutal ways you trade.
Good article with sound logic. Example 2 becomes interesting if the same percentage of 2% is used in both scenarios.
However, if you are only starting with $5000 for example, what should be your maximum risk? Or, the maximum risk does not matter so much as long as you have trades with a risk to reward ratio of 1 to 3 as a minimum. This would be a good way to quickly wipe out the $5000. Can someone please clarify for me? Thanks in advance.
I love the simplicity of your trading methods. Until recently, I was trading Futures Contracts and getting smashed from pillar to post. The risk is far too great for a small trading account.
Thanks to FOREX and your Course, I can manage risk, have wider stops if required, and sleep at night knowing I have a fighting chance of winning more trades than I lose. Choosing the right Price-Action Setups is the key.
For those that can afford Nial’s Course, I implore you to do it. He deserves to be rewarded for his work, and it’s worth its weight in gold.
Keep up the great work.
I totally agree, it is my view as well. It is amazing, I haven’t seen this explained by anyone to my knowledge. Well done. Perhaps, not deserve to win 2 to 1 against us yesterday in soccer, but certainly in this you win mate.
Regards
Vignesh
Thanks Nial for another way to look at things !
Great article. So you determine you position size by what you feel comfortable with and also by the quality of the setup. Is there a certain percentage of capital you won’t go above for a great setup? Thanks
I guess the reason being is because if you have a drawdown period you will not wipe out your account by only riking 1-2 % on your trades but after you get out of that drawdown period, trading and risking 1-2 % will take forever to get back to break even if you get lucky.
Now I understand! I will apply your risk to reward method as outlined in this article Nial! Thanks again for another eye opening experience!
The four trades example seals it.
Thanks again Nial for helping me and other traders around the world with what your course teaches, and for your ongoing input in the traders forum.
I completely agree with you wider stops has nothing to do with an increase in risk. Position sizing it what determines it so glad you make this point here. Too many trades get caught up in how wide the stops are.
I also like the idea for traders like myself who have smaller accounts should take profits at pre-determined intervals. The target should be clear before entering the trade and not left open because the market can change too quickly for those large profit targets to be had.
Some good points overall and glad you shared.
Arjun