• Money Management
  • How to apply
  • Calculate Stop Loss

Money – Management

  • Money management is the art of limiting the risk of a portfolio while maximizing its return
  • Studies have shown that up to 90% of the variance in a trader’s performance can be directly attributed to it
  • Money management is an essential element of success
  • It is not complicated, but it requires a lot of discipline
  • If you don’t use money management, you could have the best  trading system in the world, and still lose money.
  • With good money management practices, you could have a 50% accurate system and still earn great returns.

Elements of Money Management

  • A stop loss order placed for each Trade
  • A specific amount of money to risk in each trade
  • The maximum amount to risk over a given period

One trade should not matter

  • So what amount of risk should you be willing to take?
  • Never risk more than 1% to 3% of your total equity in any one trade
  • Keeping your risk small and constant is absolutely critical
  • Taking more aggressive risks could easily see your account go up as high as 20% in a day but…
  • “One trade should not matter”

Risk Tolerance

Risk Reward Trade Off


Values long term capital preservation more than the growth of returns – Accepts low risk for slow and steady growth of returns


Values medium term returns equally to capital protection –Accepts moderate risk for moderate growth of returns 


Values short term returns more than capital protection – Accepts high risk for short term extraordinary returns


Risk Profile

Position Sizing

  • Position sizing is an essential part of Money Management
  • Position sizing is the amount of equity invested on a trade
  • Finding the right balance is key to Money Management
  • Calculating correct position size (amount to trade)
  • Stop loss level in pips
  • Amount of money to risk

Calculating – Amount to Trade – Stocks

  • Lets’ say you have a possible double bottom and want to go long the share of Apple risking 1,000$
  • 100 shares requiring $15,000 as capital
  • Lets’ say you have a possible double top and want to short the stock of google risking 2,000$

Calculating – Amount to Trade – Forex

  • Lets’ say you have a possible double bottom on EURUSD and you want to go long risking 1,000$
  • 100.000 = 1 standard lot
  • Lets’ say you have a possible double top on GBPUSD and you want to short risking 500$
  • 200,000 = 2 standard lots
  • Risk/Reward Ratios
  • Trading Expectancy
  • Break Even Points 

Risk Reward Ratio - What it is

  • The risk to reward ratio shows how much money you are risking versus the potential reward on a trade
  • In order to attain the risk/reward of a trade, both the risk and profit potential of a trade must be defined
  • Risk is determined using a stop loss order
  • Reward is determined using a take profit order
  • A stop loss order is designed to limit an investor’s loss on a position
  • A profit target is used to establish an exit point should the trade move favorably

Risk Reward Ratio – Calculation

  • Lets say you have a possible double bottom and want to buy the Euro
  • You are risking 100 pips to make 150 pips
  • That’s a risk to reward ratio of 1 to 1.5

Risk to Reward - Examples

Expectancy - What it is

  • “Expectancy” is the average amount you can expect to win or lose per dollar at risk
  • Expectancy = (Pr. of Win * Av. Win) – (Pr. of Loss * Av. Loss)
  • We can also see how you could have a system that is accurate the majority of the time, but have a negative expectancy
  • Expectancy = (Pr. of Win * Av. Win) – (Pr. of Loss * Av. Loss)

Expectancy - Break even point

Expectancy - Human Nature

  • Most of us would feel better with a system that produced more winning trades than losing
  • The vast majority of people would have a lot of trouble with a low accuracy system
  • Because of our natural tendency to want to be right all of the time
  • The percentage of winning trades is not the most important factor in building a trading system