Money Management
The primary thing that you have to remember is when trading the forex, is that you are trading in a “Margin Account” and you must never over leverage your account. You can easily place yourself in a position for a margin call and have your account liquidated if you trade too many lots at one time, and the trades goes against you. You must do the math before placing your trade and doing a little extra math will help you reach your financial goals. Those are the things we will discuss in this document.
Calculating the number of lots to trade at any given time and/or on any given trade is a MUST DO in this business. Additionally, these calculations when done properly and done before each trade, will allow you to grow account value exponentially. The purpose of this document is to show all of you how to calculate your lots per trade using only a cheap calculator.
I’m going to give you examples based on my personal risk tolerance and my annual goals. I am also going to attempt to keep this very simple by using the cost and pip value of 1 pair, the EUR/JPY. Please keep in mind that these figures will differ based on your personal risk tolerance, goals, trading style (active, swing, or position), the pair you are trading and your ever-changing account value.
OK, for this example, here are the assumptions:
Current account balance = $10,000
Weekly goal = 10% or $1,000 if your account balance is $10K. Percentage of account value invested in lots at any one time = 10%. ($10,000 X 10% = $1,000). Maximum risk at any one time = 10% ($10,000 X 10% = $1,000)
Now here we are with a mini-account balance of $10,000. We are going to invest 10% of our total account balance in 1 trade on the EUR/JPY. (If you are running more than 1 trade at a time, you should adjust accordingly. Example: 2 trades = 5% each, 3 trades = 3.33% each, 4 trades = 2.5% each, etc.) In our case, 10% of our $10,000 account = $1,000, and we are buying the EUR/JPY. How many mini-lots of the EUR/JPY can we buy with $1,000? If we can buy 1 mini lot for $82.58, then we divide $1,000 by $82.58 which equals 12.1094 mini lots and we round down to 12 mini lots. (Always round down just to be on the safe side.) Now you are asking, “Where do I find the current prices of the lots?” There is a link at the end of this document “currency-pair-information”. Click this link and you’ll find the pip value and lot cost, in both standard and mini, listed there. This information slowly changes as the market moves. Now, let’s find out what your MAXIMUM STOP LOSS should be.
We said earlier that our maximum risk at any time was 10% of our account value. Our account value is $10,000 so $10,000 X 10% = $1,000. (Please note: The 10% maximum risk is our assumed number. This is a fairly high amount to have at risk at any given time. You will have to determine your personal risk tolerance. I started trading at 5%.) The higher the chart, the larger your stop will need to be – many people use a formula based on ATR that states “2.5 X ATR on the Entry Chart = Stop loss in pips”, then they figure their lots to trade based on a predetermined stop. You need to know in advance where you are going to get out of a trade, if it goes against you. Make sure that you keep in mind ………. if you place a stop too close you will get stopped out of your trade.
OK, now, we have a $1,000 stop loss maximum, and a 12 lot trade. We have a pip value of $.94, so we multiply $.94 by 12 which results in $11.28. This is the amount that we gain for every 1 (one) pip movement in our direction. It is also the amount we lose for every 1 (one) pip that the trade goes against us. Therefore, if we are willing to risk a maximum of $1,000 on this trade, then we divide $1,000 by $11.28 which gives us 88.65 pips. Round this up to 89 pips and this is your maximum stop loss in pips. This is where you MUST pull the trade, if it goes against you, if you have set your maximum risk at 10%.
The primary point that I am trying to get across is that you MUST figure out how much of your account balance you can trade and that you are willing to risk BEFORE YOU PLACE A TRADE!!!! These numbers will vary for all of us. You may decide that you don’t want to risk more than 2% of your account value or you may decide you’re willing to risk 20%. When you’re deciding on your personal numbers, keep in mind …….if you risk too little, you’re more likely to get stopped ………….if you risk too much, you could lose a large percentage of your account on a few trades or even have your account liquidated. You really need to study this market, how the pairs move and how a margin accounts works before you do your math, and before you place your 1st live trade!!!!!
We’ve talked about all the scary stuff. Risk tolerance, stop losses and how leverage can work against you. Now, let’s do a little more math, have some fun with this next step, and talk about how leverage can make you a boat load of money!
Ten percent (10%) of our $10,000 account = $1,000 for our 1st week’s profit. We are trading 12 lots of the EUR/JPY which has a pip value of $.94 on this our very first week of live trading. We multiply our lots (12) by our pip value ($.94) and come up with $11.28. Now, we divide our goal ($1,000) by $11.28 and we get a grand total of 88.65 pips. Round up to 89 pips, and this is the number of pips that you must make this very first week in order to reach your goal of $1,000 profit. That’s it!! That’s all that you have to do to become financially independent while trading the 4X! You will never need to make more than 89 pips in one week. You will never need to invest more than 10% of your current account value. You will never need to risk more than 10% of your current account value.
Here’s where that big fancy word (EXPONENTIAL) comes in …
Every Sunday simply refigure the number of lots to trade based on your account balance that day. Then continue making your 89 pips per week. Even take 4 weeks off and one year from now you will have made a total of $1,506,713.00. If you decide not to take that 4 week vacation, then your account value will be $2,297,389.00 in one year.
That’s impossible you say!!?? …….Click on the link below “sample spread sheet”. That fancy word “exponential” – add it to your trading plan and your vocabulary – then keep multiplying by those 89 pips ……every single week!!!
Please click the “currency pair information” link below and it will show you the PIP value and lot costs for each pair. When you are finished looking at the PDF, please click the back button on your browser to return to the website.
Here is a Spreadsheet that will help you manage your money based on the above money management example. When you are finished looking at the PDF, please click the back button on your browser to return to the website.
