HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
XM information and reviews
XM
86%
NordFX information and reviews
NordFX
86%

Money Management


Naeem Aslam   Written by Naeem Aslam

Although you may think the title of Money Management is pretty clear and easy to implement – how to manage your money and invest wisely, it is slightly more than that. It is the educated process of how you save, invest, budget and spend domestic income. This can also fall on overseeing money usage for a business too. Everyone in some form or another practices money management in day-to-day life, whether in their personal capacities or with investment management such as trading. Trading forex and CFDs successfully does require discipline. You’ll need a proper knowledge of the basic elements that are vital if you are expecting long-term gains from this industry. Inexperience is possibly the main reason for traders losing money in forex and CFDs trading. Neglecting your money management principles as well as emotional trading increases risk and decreases your reward. As forex is extremely volatile at the best of times, therein lies an inherent risk, and having correct money management skills are essential when entering the markets.

Risk Management

When entering in to a forex or CFD trade, there needs to be a certain understanding, that you will enter risky situations and accept this as a prerequisite for leveraged trading. There are many risks when trading, however, there are various ways to reduce these risks.

While your profits are generally connected to the risks, here are a few principles:

Position sizing can be approached in a few ways, as simple to as complex as you choose, as long as it is best suited to your platform. This way you are able to easily manage both the losing trades and the winning ones. There are three models we can follow:

Fixed lot Size

Great way for beginners to start their trading careers. This means that traders will trade with the same position size, probably small. Lots can be changed during the trades according to how the account increases or decreases during the trading period. The account size is important when starting out, keep it small and use a leverage of 2:1, this way you can steadily grow potential profits over time.

Equity Percent

The idea behind Equity Percent is based on the size of your position based on the percentage change in equity. It is best to determine the percentage of equity for every position and this will determine and allow for growth of equity in relation to position size. One can always increase the percentage of equity used for every trade, but it is not without mention, that the higher the profit potential, the higher the risk.

What is a safe percent of equity to trade with?

It is often advised to trade with a smaller percentage of equity such as 1% or 2% that equates to 50:1 leverage per trade also allowing you to stay in your position for a longer period of time. Simply put, keep the size of your trades proportional to your equity, if you enter into losses, the position size is reduced preserving the account from depleting to a zero balance too rapidly. One can also reduce the size of the initial trade when you enter a losing streak to minimize the equity damage. Remember that breaking even after losses takes more time than losing the same amount.

Advanced Equity percent with stop loss

The methodology behind this technique is to limit each trade to a set up a portion of your total account equity, this is often between 2-10%. This method differs from Fixed Ratio in that it is used in trading options and futures and helps you increase your exposure to the market while protecting your accumulated profits. You can also use our trading calculator in order to estimate the possible outcome of a trade before entering it.

Guidelines for setting trades daily or weekly exposure levels

Let’s look at a simple example: if a trader’s trading balance is $1000 and he decides to risk only 2% of the balance ($20) in every trade. In case he trades a mini lot (10,000 units) of EUR/USD, then every pip is worth 1 USD. Thus, the trader should put a stop loss order if the price drops 20 pips. Losing 5 trades in a row will result in losing roughly $100. Now, let’s say the same trader is ready to risk 10% of the budget on a single trade. He trades a standard lot of 100,000 units of EUR/USD, then every pip is worth 10 USD. In this case the trader should put a stop loss order if the price drops 10 pips (=$100) on the first trade. If he lost the first trade, the new stop loss target is 9 pips (=$90) which is 10% of the remaining balance of $900, and so on to 8,7, and 6 pips in following losing trades. Losing 5 times in a row with this kind of exposure will result in total loss of $400.

Setting trades daily or weekly exposure levels
Number of Losing Trades (balance $1,000) 2% exposure 10% exposure
1 $980 $900
2 $960 $810
3 $940 $730
4 $920 $660
5 $900 $600

Same manner of exposure calculation can be scaled to include daily/weekly exposure levels. If, for example, the daily exposure level is 10% of the balance, then in the first example the trader would need to stop trading on the same day when he lost $100.

Risk and Reward ratios using Stop Loss

When you are ready to start trading after practicing on a paper trading account, you will open your live trading account on the appropriate platform and deposit your acceptable capital. Providing protection of your invested capital when forex or stocks move against you is essential and represents the basis of money management. Trading with a serious approach to money management can start with knowing a safe risk and reward ratio as well as implementing stops and trailing stops:

Stop loss:

This is the standard method for limiting loss on a trading account with a declining stock. Placing a stop loss order will set a value that will be based on the maximum loss that a trader is willing to absorb.  When the last value drops below the set amount, the stop loss will be triggered and a market order is put in place so that the trade is haltered. The stop loss closes the position at the current market price and will prevent any accumulating losses.

Trailing stop:

In trailing stop there are more advantages when compared to the stop loss and it is a more flexible method of limiting losses. It allows traders to protect their account balance when the price of the instrument they have traded drops. An advantage of the trailing stop is that the moment a price increases, a ‘trailing’ feature will be set off, permitting any eventual safeguard and risk management to capital in your account. The main benefit of a trailing stop is that it allows protecting not only the trading balance, but the profits of the ongoing trade as well.

Risk and reward ratios

Another way you can increase protection of your invested capital is by knowing when to trade at a time of potentially profiting three times more than you will risk. Give yourself a 3:1 reward-to-risk ratio, based on this you should have a significantly greater chance of ending up in a positive return. The main idea is to set the target profit 3 times larger than the stop loss trigger, for instance setting a take profit order on 30 pips and stop loss on 10 pips is a good illustration of 3:1 reward-to-risk.

Keep your reward-to-risk ratio on a manageable scale here is an easy illustration of the reward-to-risk ratio to better understand it:

Reward-to-risk ratio
10 Trades Loss Win
1 $1,000  
2   $3,000
3 $1,000  
4   $3,000
5 $1,000  
6   $3,000
7 $1,000  
8   $3,000
9 $1,000  
10   $3,000
TOTAL: $5,000 $15,000

Money Management tips with AvaTrade

Whether you are a day trader, swing trader or a scalper, money management is an essential restraint that needs to be learned and implemented per trade opened, no matter your trading style or strategy. Implement the money management techniques or you increase the risk of losing your money. These tips are basic and easy to follow when trading and in risk management:

You should never invest what you can’t afford to lose

First rule of thumb is never fund your account with money that you don’t have. Remember that if you can’t afford to absorb the losses of the invested capital then do not fund your account with money that you can afford to take a loss on. Trading is not a gamble, it needs to be entered into with educated decisions.

Stops and limits are meant to be implemented per position

As your broker we advise you to set stop loss orders. Take them as seriously as you do your investment, trading should be done with precision and not luck. You need a stop loss for every trade, it is your safety net that will protect you from big price moves.

When you profit

When you reach your target profit, close the trade and enjoy the gains from your trading. Withdrawing from AvaTrade is simple, fast and safe. Open your account and enjoy all the benefits and trading advice from market professionals, test our services on your risk-free demo account.

Setting your stop loss and take profit orders

One of the most basic of trading principles are how to set your risk reward rations properly. This can be done by establishing where you can define your trade is going, how far the market will go in your favor. Having this number in mind sets the tone for organizing your Stop Loss (S/L) and Take Profit (T/P) orders. As we mentioned, the traditional ratio in currency trading is 3:1 for the beginner, using a lesser risk reward ratio will become too risky. For the more experienced trader this can be increased to a minimum of 4:1 but never above 5:1.

Steps for setting up your S/L and T/P:

To illustrate the aforementioned rules here’s an example: The current price EUR/USD is trading at is 1.02660. We assume that the market will trend upwards, and we want to ride the trend, since we believe that the market will go to 1.02759 at a minimum. So we would take our target price of 1.02760 and subtract the current market price of 1.02660: 1.02760 – 1.02660 = 100 (pips). To calculate the value in pips of the risk factor based on a 3:1 reward/risk ratio we divide the total number of pips (100) by the reward ratio (3) = 33.33 pip (risk). We have easily worked out the risk and reward targets and now we set the S/l and T/P levels. Finally, to calculate the final stage take the current market price and subtract from it the risk value. Then add the reward value to the current market price and the final figures will be the S/L and T/P. 1.02660– 0.00033 = 1.02627 S/L. 1.02660 + 0.00100 = 1.02760 T/P.

Money Management main FAQs

#source


RELATED

Nixse: Deep Access to Global Markets

Trade over 1500 instruments on the NX Trader platform, choose from Currencies, Commodities, Stocks, Indices and Digital currencies with razor-thin fees and low commissions on all markets...

An Introduction to Precious Metals

Precious metals have been used as an investment option as well as a method to store wealth, with gold being the most commonly used. Today there are many ways to trade...

How to be a value investor

Value investing is an investment strategy that focuses on stocks that are underappreciated by investors and the market at large. The stocks that value investors seek typically look cheap compared...

How to stop qwertying your way to hackers: 5 internet security tips from OctaFX

Who will you blame if you wake up one day without a job and with no money on your bank card? Yourself. That is if you don't follow internet security tips. The global broker OctaFX outlines the main do's and dont's of staying safe online.

Trade Silver Online: A Complete Guide for Beginners

To start with, what is silver trading? Traders have highly valued silver for many years now. The metal has various usages including jewellery or as a form of currency....

Relative Strength Index (RSI): Unveiling Price Momentum and Overbought/Oversold Conditions

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. Developed by J. Welles Wilder, RSI ranges from 0 to 100...

Common Mistakes Made by Novice Traders and How to Steer Clear of Them

Trading in the financial markets is a realm that beckons many, but it is fraught with challenges that often go underestimated by novice traders. A lack of profound understanding of market intricacies...

Ultimate guide to trading Bitcoin for beginners

Bitcoin is the world’s first cryptocurrency that paved the way for the multi-trillion dollar crypto market we can trade and invest in today. Read on to learn everything you need...

Why User Identification and Verification Are Vital for Trading

When you join FBS, or any other financial company, for that matter, you need to pass a verification process to get full access to the services. You may feel...

3 Not-so-hot Tips for New Traders From

A new wave of investors, or collectively known as “Generation Investors”, has spurred into the stock market during the pandemic. Research conducted by the FINRA Investor...

MetaTrader 4 (MT4): A Comprehensive Guide

MetaTrader 4, an offering from MetaQuotes Software Corporation, has firmly rooted itself in the world of foreign exchange trading. It has become an iconic platform...

All you need to know about Bitcoin

Bitcoin (BTC) is a digital currency. It doesn't exist in a physical form. Instead, there is a special cryptocurrency public ledger, which has records of all the Bitcoin transactions...

Ultimate guide to trading Polkadot for beginners

Blockchains and the innovations they offer largely existed as isolated entities in the crypto space, unable to share value or communicate with each other...

What is a Limit Order?

A limit order is a buy or sell order of a digital asset at a specific price. A buy limit order can only be executed at or below the limit price, while a sell limit order can only be executed at or above the limit price...

Frequently asked questions about Cryptocurrency CFDs

Bitcoin is a digital currency that was created in 2009. Its creators are unknown, as they disguised themselves using the alias of Satoshi Nakamoto. When Bitcoins are bought or sold...

History of derivatives. Part 1. What are financial instruments?

You’ve been hearing about trading instruments here and there. This article will briefly introduce you to derivatives, forwards, and futures. Get comfortable and enjoy interesting information...

What is a Bear Market? A Complete Guide

Sometimes, during market cycles, the stock markets may plunge, and prices could fall. It may be for a short period of weeks or months, or even drag on for years...

Dogecoin vs. Bitcoin: Which one is the Better Investment?

Dogecoin and Bitcoin are two well-known crypto assets. However, some traders may not know how to compare Dogecoin vs. Bitcoin, so knowing some of the significant similarities and differences...

How to Trade Major Currency Pairs

The major currency pairs traded by forex traders around the world are the following: EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, NZD/USD...

Cable or Loonie? The ultimate guide to currency nicknames

What are these pro-traders talking about? Who or what are Matie and Guppy? Are they distant relatives or secret code words to enter a sorority?

Vantage information and reviews
Vantage
85%
FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.