[text_block style=”style_1.png” align=”left”]Before we cover Risk Management:
Lets have a look at Money Management..
How much money is good enough to start trading?
I have encountered this question many times.. and to disappoint you there is no correct answer to it..
First off, there are no two traders whose desire and goals are the same. Some are trading with a long term financial goal, others are trading to earn a living and put bread on the table..
One trader wants to accumalate enough to buy a USD. 20K car, the other wants to earn USD 300 for the weekend or even some USD 100 to buy groceries by evening..
A reasonable System will give 3%, 5% to 10% monthly.. forget the doubling your account in one month, that nonsense only works on a streak and such traders only last for a moment like shooting stars that attract attention for a while and its gone forever..
You want to be a star that shines forever, and you dont do this by crazy wins or homeruns.. its only by consistent average wins, but the homerun comes, we take it.
Having said that, how much is enough to start with..
I will not skirt around the Issue.. any amount below $1,000 is a waste of time and mental bandwidth, even if the broker entices you to deposit the minimum $50, don’t fall for it.. The Ideal amount is upwards of $5,000 or even $10,000 if you can..
$1,000 is a good start for a learner.. it helps you to get minimal wins and stay disciplined.. Greed is the undoing of forex traders.. they want to double account and repeat it everytime there is some big news on economic calendar..
Instead of toying on a demo account, its best to trade with minimal $1,000 real account following one system, be it a proven indicator with entries and exits or some signals from a professional trader.. but dont hop hop allover with new systems.. if you want to try new ideas.. thats what demo accounts are for..
Why is it important to stick to one system per account: and not fall for every one thrown around in forums?
If a system has a draw down of 30% but has returns of 80% per year.. what does that mean? It shows that if you have a $1000 account and trade with the said system, you’re likely to drop your account to $700 but before the year ends.. the account would recover and even climb to $1,800 at the end of the year.. so losses should not make you panic if you stick to one system and stop envying your neighbors who post wins every so often but not their losses..
Finally, on Money Management..
Whereas, we have underscored that each trader is in a unique situation and has different levels of desire.. It’s important to note that our goals match these two financial goals:
If you have a small account starting at $1,000 then your goal should be to grow your capital. such that if you make 10% gains in a month.. your capital rises to $1,100 the following month and by end of year you would have $3,138.43 as trading capital since your previous gains will also compound..
If your Account is $10,000 then you can be comfortable to say you are trading for profit. If you make 10% profit per month.. thats $1,000 a month.. on average.. and once every two years.. you could get a winning streak that doubles your account.. but you should only pay attention to the average consistent wins..
There are only two things to consider in Risk Management:
- Maximum number of trades open
- Maximum Lotsize for respective trading capital
On maximum number of trades – it should be Ten (10). dont open more than 10 trades at a go.. thats it.. as an experienced trader since 2007, I could write an entire book on why 10 but you will understand more when we expound the second rule on lotsize
On maximum lot size. for Every $500 – each trade should be 0.01 Lot. So if you have a $2,500 account then you would have 2,500 with $500 set and get 5.. so you take 5 and multiply by 0.01 lot to get 0.05 lot size per trade.
another example if your account has $1,000 capital, then that account has two sets of 500s so 2*0.01 = 0.02 Lot per trade now if you multiply that with maximum number of trades which is TEN then 0.02 * 10 = 0.2 Lots open in a $1,000 account
On Leverage: 1:50 is ideal 1:100 to 1:200 maximum is ok
*I don’t care how much of an experienced trader you are or will be.. as long as you are not disciplined in Risk Management you are doomed to fail by your own weight..
*Risk management accounts for 70% of your success, 20% is a good strategy, 10% is access to tools, time, broker and everything else..[/text_block]