Forex Forums |

Go Back   Forex Lasers Forum > FOREX TRAINING > Forex School & Education

FX SCHOOL (8) : Money Management

Forex School & Education

Closed Thread
LinkBack Thread Tools Search this Thread
Old 08-08-2009, 06:59
Join Date: Sep 2017
Posts: 15
Default FX SCHOOL (8) : Money Management

Click image for larger version

Name:	FX_School_8_Money_Management.png
Views:	9
Size:	5.3 KB
ID:	2164


Money management is exactly what you think it means: managing and controlling your deposit. Let’s say for example you have deposited $1000 into a Forex broker, and you load a chart, e.g. GBP/USD. Getting down to business, lets say you’ve applied your system/method, have seen an opportunity to make a profit and you’ve decided to make a trade. So you might want a profit of 50 pips (known as the “take profit” or TP). And you've also decided that the most amount of pips you’re willing to risk is 30 pips (known as the “stop loss” or SL). I.e. your TP is 50 pips, and your SL is 30 pips. This would mean your potential reward is better than your potential risk, which is a very good basis for a system.

So, let’s say you think the GBP/USD is going to move up, and you want to buy that pair, therefore if you went long (i.e. bought) GBP/USD at 1.4421, your TP would be at 1.4471, and your SL would be at 1.4391. So far, so good.

But, the price of GBP/USD might go down, against your anticipated direction, and hit your “Stop Loss” at 1.4391, meaning you’ve just made a loss of 30pips. Or, the GBP/USD might go up, in favour of your anticipated direction, and hit your “Take Profit” at 1.4471, meaning you’ve just made a profit of 50 pips. Of course, you’d have to take the “spread” into consideration (the bit that the broker charges), and on the GBP/USD this is typically 3 pips. So really, you’ve made 47pips profit.

How much money is a pip worth? It depends. Usually, on a standard lot, 1 pip = $10. So if you’ve made 47pips on the GBP/USD on a standard account, you’ve just pocketed $470.

So, wait a second… You had $1000 and you made $470? That’s close to 50% profit in one trade. Ok, so let’s do the math. What if you made 50% each day for a week? Let’s work it out:

Initial deposit/investment - $1k

Monday - $1.5k

Tuesday - $2.3k

Wednesday - $3.4k

Thursday - $5k

Friday - $7.6k

Wow, at the end of the week, your final equity is sitting at a handsome $7600! So after your initial deposit, that’s a pure profit of $6600 in just one trading week! Quite amazing huh......

Ok, hold it there before we all book our luxury holidays. Firstly, it’s unlikely we’ll get 5 winners in a row, and secondly, even if we did, it would be foolish to risk so much per trade. Because remember, if you look at the first trade, if we are aiming for a $470 profit, then it means we’re also risking $300, since if the trade was to go wrong, that’s how much we would lose. Oh dear. And what if we had 2 bad days in a row? That’s a total loss of $600. On a $1000 account! So we’re left with just $400.

So let's get this straight budding trader - there is no guesswork in Forex trading, and there is no risking huge sums of money. Unless of course, you wanna lose your shirt. Rather, Forex trading is an acquired skill, via applying the technical and/or fundamental analysis of a currency pairing, and the application of this specific knowledge.

Concerning the above example, what we would have to do is lessen our risk, by at least ten times. Meaning, on a $1000 account, for that specific GBP/USD trade, we would be going for a profit of $47 with a potential loss of $30. Yes, if you had a $10k account, then by all means you can trade higher “lots”. The number of lots is how you determine the amount of money you’re willing to gain or lose.

Remember, money management is related to your deposit/equity. The best way to calculate your risk (i.e. Stop Loss), is to decide how much you’re willing to lose on any given trade, in terms of percentage. So if you’re prepared to lose 1% on your account, then it means the most you can lose on any trade on a $1k account is $10, which is much more bearable. Likewise, on a $15k account, if you risked 1% on a trade, then the most you could lose on that trade is $150, which is totally reasonable. Again, everything is relative.

Closed Thread

Thread Tools Search this Thread
Search this Thread:

Advanced Search

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are Off
[IMG] code is On
HTML code is Off
Trackbacks are On
Pingbacks are On
Refbacks are On

Similar Threads
Thread Thread Starter Forum Replies Last Post
Money Management is very important profit Beginner Talk / Q and A 7 11-07-2023 12:16
We am always thinking about losing money as opposed to making money Albert04 Forex Discussion 5 22-08-2021 11:18
Can you really make money in forex? KajolThappar Forex Discussion 36 15-09-2020 16:58
A Neat Money Management System Henry Forex Systems 6 28-07-2015 18:16
What Expert Advisors will make money in 2010? Scottfx99 Expert Advisors / Robots 0 08-01-2010 09:39

All times are GMT. The time now is 23:00.

Powered by vBulletin® Version 3.8.10
Copyright ©2000 - 2023, vBulletin Solutions, Inc.