• 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

  • THE CONSERVATIVE TRADER

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

  • THE MODERATE TRADER

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

  • THE AGGRESSIVE TRADER

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 $15,000 as capital
  • Lets’ say you have a possible double top and want to short the stock of google risking 2,000$
  • 40 shares

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