My very first impression was very simple. Ensure that our stop loss is just 20% of the total. Little did I know that money management was more than this? If my trade accuracy is 60% then it would be fine. However as beginners, to achieve such high trading success is a challenge. 20% stop loss and you loss 5 times is 100%. Furthermore one must also be selective in trades which only have 2:1 win loss ratio.
Money management is individualistic
One type of money management cannot fit all. It is based upon 2 criteria
A) win accuracy
B) risk appetite
When I was working as a market analyst, it was a norm for good traders to have a 70% win accuracy. So you should look at your own trading statement and understand your accuracy. High win accuracy traders could afford to have higher risk. The risk should be anywhere from 5% – 10% of total account. As usual traders should look for trades which yield 2:1 win loss ratio however due to the high accuracy, sometimes 1:1 ratio can be taken. However I do not recommend anyone taking any 1:1 win loss ratio trades. No trade is also a win trade.
The lower winning ratio traders should take around 2% – 5% risk of total account per trade. Traders in this category can have as low as 40% win ratio. However traders in this category should adhere religiously to trades which can return a 2:1 win loss ratio or higher only. They will have to pass trades which yield lower returns no matter how attractive the trade is.
The chart below is the chart of the EURGBP hourly chart. I have identified that High A and High B is a strong resistance area and sell trades should we see some bearish signals. A confirmation sell signal emerged at high B and I started to look for a sell entry. In this example, entry was made at the midpoint of both High A and High B at 0.8577. Then we need to see the high of A and B, which is the higher high. From the chart we could see clearly that high B is the higher high. Thus my stop loss would be a price close above the high of high B. High B is recorded at 0.8597 which is 20 pips from entry. So if we have a 21 pips stop then we must have at least at 42 pip profit.
Lets say you have USD2000 account. 2% of USD2000 is USD40. Your risk is 21 pips. So your lot size would be USD1.90 per pip (USD40 / 21 pips). From the diagram, price moved 49 pips in our direction which means that our target of 41 pips was achieved. This translated to a USD79.8 profit.
The focus on many people is onto money management . There is another element which is equally important and should never be ignored is emotion management. I had a student informing me that he will be funding his account about USD100,000 as he was making a constant 10% return on his account monthly. He was used to trading at USD2000 account. I then simply ask him, “John (not his real name) I am very happy for you that you are returning a respectable return every month. Can I ask you a simple question”. “Yes, sure” said John enthusiatically. “Imagine you just entered a trade and after an hour you are losing USD500, what would be going through your mind?”. “Eer I think I would not feel comfortable at all” said John. “Would you be looking at the trade all the time, glued to the screen and maybe distrupt your original trading plans?” I continued. “I think I might be doing that” said John after a long thought. “John, USD500 is not even 2% of USD100,000. Your emotions are not tuned to trade such a big account and I do not think it is advisable for you to start trading such a big account. Furthermore your normal trading routine would be interrupted by your constant monitorong which is definitely going to sap a lot of energy from you” I said in a clear voice to send the message clearly through. “I get what you mean now, I should not have let my emotions and greed take over me. Thanks for the advice” said John. “You are welcome” I replied.
Have a good look at your account, print the statement out. Here is the checklist for reference:
a) What is your win loss ratio?
b) When you win, do you make more money than you lose? If yes how much?
c) Does your lot size increment follow money management principles?
d) When you increase your lot size, do you lose more than you win?
e) Are you happy with your trading lifestyle?
If your answer to all the 5 questions are too the nagative side, you would have to review your trading management which is the title of my article today “Manage yourself and you will manage your account properly”