Member Article

Money management

This is one of the most important concepts you will ever read about trading. Why is it important? Our goal is to make money. We have managed to make money and we must learn how to manage it. This is one of the areas in the trade that usually anticipate. Many traders are just anxious to get it right into trading regardless of account size. They simply determine how much they stand to lose in a single trade and hit the traded button. There’s a term for this type of investment, it’s called gambling, and that’s when you trade without money management. Money management rules will not only protect you, it will make us very profitable in the long run. If you do not believe me and you think that gambling is the way that a man is rich, then consider the following example.

People gamble into the hope of winning a big prize and in fact, many of them succeed. But in the long run, even when there’s though people win jackpots, the casino rake in more money from people who do not win, and that makes the casino profitable. That’s why we always hear “the house always wins”. Even if a person has won $ 1 million on a slot machine, the casinos know that day will be more than 1000 gamblers whom won’t win the jackpot and the money will go directly into their pockets. You will have the opportunity to become profitable. You want to be a rich statistician, not a gambler because in the long run, you’ll be a winner. So, how to become rich statistician instead a loser?

1% risk rule for a €100.000 trading account Making a long stock trade with an entry price of €75, and a stop loss price of €70, would be calculated:

Maximum Capital = €100.000 / 100 = €1,000 Trade Size = €1.000 / ((€75 - €70) x 1) = 200 shares If the trade makes a loss (by trading at its stop loss price), the 200 shares will lose €5 each. ​Total loss of €1.000 and it is 1% of the trading account.

1% risk rule for a €30.000 trading account is making a short futures trade in a market with a €10point value, with an entry price of €4,125 and a stop loss price of €4.150, would be calculated as follows:

Maximum Capital = €30.000 / 100 = €300 Trade Size = €300 / ((€4.125 - €4.150) x 10) = 1 contract (actually 1.2 contracts, but this is not possible). If the trade makes a loss (by trading at its stop loss price), the one contract will lose €250 (it is less than 1% of the trading account).

If you open an account with $300 and use 200: 1 leverage to open mini lot trades of $10.000 and double your money in one trade.

Nothing could be further from the truth. Not everyone has $5.000 to open an account using larger lots with a small account balance. An investor deposits $10,000. The account is set to 0.5% margin or 200:1 Leverage. This means that for every 5,000 lot opened, the investor must maintain at least $25 in Margin (=$5,000 x 0.5%).

He bought USD 100.000 (20 lots at $5.000) and the selling of CHF 101.500 (= $100.000 x1.0150) by using $500 as a Margin (= $100.000 x 0.5%) and borrowing USD 99.500 from broker (= $100.000-$500).

The investor decided to take his profit and enters a sell market order in the broker trading platform. The investor sold of USD 100.000 (20 lots at $5.000) and the buying of CHF 103.000 (= $100.000 x1.0300). Leverage is 1:100, Margin is 1% EUR/USD rate is 1.1100), 1 lot of standard contract of EUR/USD = € 100,000.00 Euro. We have to multiply the Contract size in dollars. Therefore 1 lot of EUR/USD = 111,000.00

As Margin is 1% of the Base Currency. 100 x Dollar. Client has to have a minimum of $1.1100 in order to be able to buy/sell this position

Client wants to open a 4 mini contacts (40,000base currency) = 0.4 Lots. At the rate of GBP/USD = 1.3200 (£ 40,000.00 = $52800.00) 1/100 * $52800 = $528. The client has to have a minimum of $528 in order to be able to buy/sell this position. Current price of crude oil was quoted as U.S. Oil $ 41.00 You bought 1 lot (100 barrels) at a price of $ 41.00 The value of trades x Price x factor margin (percentage). 100 (a barrel) x $ 41.00 x 0.01 = $ 41.00 The smallest increase in oil prices is 0.01. The smallest trade that can be done is one lot (100 barrels). At this level, each pip is worth $1. When changing prices from $41.00 to $41.30 the difference was 0.30 (30 pip). If you trade 1 lot, each pip is worth $ 1, your profit or loss will be $30.

Leverage = 1/Margin = 100/Margin Percentage A 200:1 ratio yields 1/200 = 0.005 = 0.5%. If the margin is 0.01 then the margin percentage is 1%, and leverage = 1/0.01 = 100/1 = 100. Margin Requirement = Current Price x Units Traded x Margin Buy 1000 Euros (EUR) with a current price of 1.11 USD, and your broker requires a 1% margin. Required Margin = 1000 x 1.11 x 0.01 = $11 USD.

The advantage of trading forex on margin is that you can make a high percentage of gain compared to your account balance. It has a $1000 account balance that it isn’t traded on margin. It initiates a $1000 trade that nets you 100 pips. In a $1.000 trade, each pip is worth 10 cents. The profit from its trade would be $10 or a 1% gain. You were to use that same $1000 to make a 50 to 1 margin.

Summary

Trade only with a small percentage of your account, because the smaller the better. It’s recommended to load your account a 3% or even less. It is desirable to trade when you have a high ratio between profit and risk. The higher the ratio, you are entitled to more errors. The less you risk per trade, the less will be your maximum overload.

This was posted in Bdaily's Members' News section by Dwayne Buzzell .