Money Management

If you master money management, you'll be consistently making money in the forex.

Part 4: Money Management – The Key to Profitable Trading

This section is perhaps the most critical of all. If you master money management, you’ll be consistently making money in the market. Here, I’ll outline simple but powerful rules to guide you through the process.

Rule 1: Set Your Goals

Before you begin live trading, you must set realistic financial goals. Your goals will shape your trading style and decisions.

Examples:

Part-time income goal: $123 per week.
Full-time income goal: $246 per week.
Retirement goal: Grow your account by 2.5% per month.

Your goals should be aligned with your financial situation and time commitment to ensure they are reasonable and achievable.

Rule 2: Set a Pip Target Per Month

You need to define how many pips you aim to collect each month.

Example:

My goal was 1,000 pips per month, which breaks down to 250 pips per week.

With a weekly target in mind, you can ask yourself these three questions:

Can I make 50 pips in 5 trades this week?
Can I make 125 pips in 2 trades this week?
Can I make 250 pips in 1 trade this week?

Since I prefer to trade with minimal effort and free up time for other activities, I focus on making all my pips in one trade. This takes my mind off constantly thinking about money and instead focuses on collecting pips because pips = money.

Rule 3: Set the Amount You’re Willing to Lose

You need to determine your risk tolerance. For me, this wasn’t easy, but I set a goal to risk only 1% of my monthly income on any single trade.

Example:

When I was earning $500,000 JMD per month, I decided to risk 5,000 JMD per trade.
In USD, this equated to $36 per trade, using the exchange rate at the time.

This amount was acceptable to me, considering I was already spending that much per week on non-essential activities like going to bars or playing poker.

Risk Capital Calculation

To start trading, I followed the basic rule of only risking 2% of your total capital on all live trades.

Calculation:

If I was willing to lose $36 per trade, I needed $1,800 USD in capital (36 ÷ 2% = $1,800).

Now that I knew the capital I needed, I could work out the lot size per trade.

Important: If you don’t know what a pip or lot size is, pause here and do some research before proceeding.

Rule 4: Start with $1,000 USD Capital

If you don’t have $1,000, save up until you do. In the meantime, practice on a demo account.

In any field, there’s a probation period in Forex, it’s not about time, but about the number of trades.

The probation period in Forex trading is 100 trades. After completing 100 trades, you’ll be ready to take on bigger risks.

Lot Size Recommendation:

When trading with $1,000 in capital, I recommend trading with a lot size of $0.10 per trade.
If you have 10 trades open at the same time, each trade should be $0.01 cents per lot, not $1 per lot.

Risk Management Example

If the price moves against you:

10 pips = $1 loss
100 pips = $10 loss
1,000 pips = $100 loss
10,000 pips = $1,000 loss

If you lose 10,000 pips, Forex trading may not be the right path for you. It’s better to view the loss as tuition for a course you didn’t pass and consider other business options.

Success Measurement

On the flip side, if you manage to gain 10,000 pips, you’ll have doubled your capital, which means you’re good enough to trade like the big players. At this point, you’ll be able to:

Increase your risk while maintaining control.
Copy your trades onto a larger account and manage them with ease, knowing you’ve mastered the system.

With a solid grasp of money management, you’ll be ready to approach trading like a professional.