Trade with an Edge

Forex Money Management - The Essential Ingredient

Money Management

Forex money management is the magic ingredient for super-successful forex trading. Don't take my word for it - let the numbers speak for themselves. Take a look at this chart...

Put your own numbers in - Click here to download the Excel spreadsheet

What it's saying is this. If you can grow your account by just 1.56% every week (or about 0.3% per day) - then after one year you will have grown your account balance by 120%.

Starting with an account balance of $20,000 - a 0.31% increase in equity every day gives you $44,731 at the end of the year. Assuming you don't make any withdrawals during that year.

How about if you start with an account balance of $100,000? - Winning 0.31% every day gives you $223,656 at the end of the year. Again, that's 120% of your starting balance.

It actually doesn't matter what the starting account balance is - it's all proportionate.

Think "Equity Growth % - not Absolute pips or cash $$$"

We're using the power of compounding to grow equity here.

This is the key thing to remember. Think about setting your goals proportionally in terms of equity growth % - and not traditionally in absolute pips or cash $$$. Compounding does the rest for you.

So how many pips do you need to win daily, in order grow your account balance 0.3% a day, do you think?

Just 11 pips a day

Well, it all depends on what the pip value is - but on the day I did this analysis for the eurusd, you only needed to win 11 pips, in order to make 0.31% for the day - which (if you did that every day) would mean a growth of 120% in your starting balance in one year. No matter how big or small your account balance.

How do I know it was 11 pips? Take a look at this...

This is the Trade Plan Calculator from www.ForexSmartTools.com - a really neat piece of software I use for modeling all my trades before I take the trade.

I use the Trade Plan Calculator to tell me how many lots I should trade for my risk to be a max of 1% of account balance (1% being my preferred trade risk profile).

It uses currency pair pip value, entry and stop loss info to calculate my actual risk and equity as a % of account. That helps me to balance my risk/reward and optimize my trade returns.

Before using this software, I used to trade 2 or 3 same-size lots all the time. The Trade Plan Calculator showed me I was undertrading - trading with risk too far below my risk limits and not optimizing my profits.

In this example - the purpose here is to show that just by making 11 pips on this trade grows my equity by 0.31%. If I did this every day of the year - my account will grow about 120%.

And - once I've made my daily target, I wouldn't need to trade any more today! I could shut down my computer and do something else - go to the beach - or whatever!

Do you think 11 pips every day is possible? It certainly seems feasible to me.

This is an illustration - in reality I would only consider taking a trade if the Risk /Reward was 1:2. So I would be looking for 70 pips on this trade. But I could close it out after +11 pips and make my daily target if I wanted to.

Beat the Wall Street Top-guns

Wall Street hedge funds typically make 12-17% a year. And they have waiting lists of wealthy investors queuing up to invest with them for those returns.

Imagine you were making 120% yearly - Wouldn't that make you feel good? It does me! You would have investors forming a queue outside your door too!

Setting Goals - Proportionally

So the idea then, is to set a daily and weekly target for equity growth. The targets should be feasible. For example - a good daily target could be between 0.3%-1% per day, and a good weekly target 1.5%-5% per week.

My weekly target at the moment is now between 2% and 5%. I look for about 0.4% - 1% a day on average. That gives me an annual growth projection of 175%-1104% on my start-of-year account balance.

Plus I always keep my risk profile per trade down to 1%-2% and my leverage below 5:1

Why does my target vary? I vary the number of lots I put on a trade depending on the circumstances of the trade.

For instance, a well-structured pattern with a PRZ at a strong turning point (strong Supply or Demand zone) with Reversal or Divergence RSI signal deserves a heavier trade than where you have a not-so-well structured pattern, or price at a weak supply/demand zone, or with no RSI signal.

Forex money management lessons to take home

Having a method like harmonics to put the odds in you favour is only part of the equation. Good forex money management is the other essential key ingredient.
Set yourself daily and weekly goals.
Think "Proportional". Set your goals in terms of equity growth % - not in terms of absolute pips or cash. Let compounding do the hard work for you.
Trade smarter - not harder. That's the motto of www.ForexSmartTools.com - They have some great money management tools - check them out.