Quote from fcg007:
Is $300 - $400 a reasonable goal for an account this size?
With a $50K in cash I donât think your biggest worry is not how much money youâre going to make, your biggest worry should be how much money you could potentially lose. Below are some basic rules on money management. I hope I have helped you, let me know if you need anything else.
Money Management
Traders need Money management to control their money flow: the money coming in or out of wallets. Money management is a crucial tool a trader needs to learn if he or she wants to keep their money.
There are several rules of good money management:
1. A. Risk percentage of total account
The main idea of the whole trading process is not to lose money first and then think about making money (it is impossible to never lose money, but you have to limit the amount lost).
If you want to become a skillful trader, you should clearly understand that survival depends on the skills acquired.
A trader needs must sharpen up all of the tools at his or hers disposal in order to keep their accounts alive and hopefully make some profits. Also it should be noted that Big time traders tend to have deep pockets, which means that under unfavorable conditions they are financially able to sustain big losses and continue trading. Even the best and brightest can be taken by the market.
A trader who has made 12 trades risking only 2% of balance per trade, under the worst conditions would lose only 20% of the total account. The same trader who had been trading 10% of the account balance per trade would end up with loss of over 69% of the total account balance. Money management is a must when trading real money.
Now if that does not show someone the importance of money management, then they should go back and rethink it through. We recommend to all traders to master their strategies and money management before considering putting real money in the market.
If the chances of winning a trade are smaller than potential losses, then the position of staying aside should be taken. (If the reward is not worth the risk, then do not take the risk).
Example: 100 pips to lose versus 80 pips to win, we figure 3-1 to 4-1 would be the best choice, even though there are traders who think 2-1 is acceptable, but what happens if you have multiple losses in a row? It is something that must be thought of ahead of time.
Taking into consideration a 3-1 or 4-1 money management rule as a must, in the long run will dramatically increase trader's chances to succeed in making stable gains.
If a trader wore to constantly use a 1:3 risk / reward ratio and being successful only 33% of the time, trader will still make a profit. The higher the reward ratio (compared to risk ratio) the better are chances to end up in profit.
1. D. Protective stops
Traders must learn how to used protective stops and, how to implement them in their money management rules. The example below shows how to apply protective stops with money management rules:
In order to see how it works we are going to risk no more than 2 to 3 percent of our total account. Below is an example that will help to understand this idea:
Letâs say we have a trading account of $2,000 with Broker X and we got 10:1 leverage, which would allow us to trade up to $20,000. But, doing such a thing is not recommended; rather a trader should start with 1:1 leverage and work his way up as he improves.
For this example, we are going to risk 2% of the account in each trade. So we take our $2000 x 2% = 40 dollars. This means that if the price goes against us, our money management rules say that we will be out of the trade once we are $40 in the minus.
So, now letâs take our $2,000 and leverage it up to $10,000:
For this calculation we are going to say that the pip value of our trade is $1 per pip. This means that with each pip we gain will result in a $1 gain, and each pip lost will reduce our account by $1. Given that we have chosen to limit our loss to $40 in one trade, we will be out of this trade once the market makes against 40pips, which is $40 of our account (2%).
Now if we take a position of $5,000, the pip loss will raise to 80 pips, because the pip value for a $5,000 position is going to be 0.50 cents.
This should have been a good lesson on money management, and how it is bound to real account value, because even if leverage allows us to trade larger positions, an intelligent control of risks is required to keep account protected.
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