Money Management
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Money Management

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www.sm-forex.com ...

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This is the most overlooked aspect of trading by new traders. Miss out this chapter at your peril because failure to employ good money management principles will bust your account no matter how good a trader you are. Good money management keeps us in the game when most novices are knocked out.
Many traders see the trades but don’t manage their money very well and ultimately they lose all their equity.

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  • The Forex Codes (C) Copyright Forex Education Ltd 2006 To be on screen during arrival of potential delegate
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 One of the most overlooked areas MM keeps us in the game when many novices are knocked out Many people see the trades but don’t manage money well
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 By an inch it’s a cinch, by a yard it’s hard! We are not gambling, we are investors We are here for the long term not to hit a jackpot Only risk 3% of your bankroll so that you can survive your losing streaks
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 10 trades at 10% of equity only leave a third left after 10 losing trades but with 3% risk 73% equity still left 26% drawdown Vs 65% drawdown
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 Let’s say you have a $100,000 and you lose $50,000.  What percentage of your account have you lost?  The answer is 50%.  Simple enough.  Now, what percentage of that $50,000 do you have to make in order to get back to your original $100,000?  It’s not 50%--you’d have to make back 100% of your $50,000 to get back to your original $100,000.  This is called drawdown.  For this example, we would’ve had a 50% drawdown.
  • The Forex Codes (C) Copyright Forex Education Ltd 2006
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 So the novice risks more to “get it back” because due a winner
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 If your trade needs a bigger stop you cannot take the trade. Do you have that much discipline? You have to protect your equity whilst gradually building up your pot and compounding. Don’t go for the home run
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 Remember the idea is to stay in the game! Vary between 1 and 3% depending upon your confidence in the trade Stake calculator?
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 Make sure they get a copy of ecourse 3 in their notes Broker lends you the balance - $99,000
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 See excel spreadsheet for compound interest Do examples from ecourse3 One mini lot controls $10,000 of currency, so you are borrowing $10,000 from your broker, secured by your $1,000 account balance. Mathematically, the equation to calculate leverage is: Transaction Value / Account Balance = Leverage Expressed as a ratio: Thus, $10,000 / $1,000 = 10 Or, in your trade, you are leveraged 10:1 What if you wanted to use the whole 100:1 leverage available… Transaction Value / $1,000 = 100 This would make the transaction value equal to $100,000 which of course is one standard lot or 10 mini lots.
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 Go through table from ecourse 3. Go through examples 1 and 2 Broker differences. Always check.
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 Explain risk to reward. 1:1 lost £300 win £300. 1:2 Lose two lots of £300 and win one £600 etc.
  • The Forex Codes (C) Copyright Forex Education Ltd 2006 To be on screen during arrival of potential delegate

Money Management Money Management Presentation Transcript

  • (C) Copyright 2006 Stephen Margison www.sm-forex.com “ IT’S TIME TO GET MORE OUT OF LIFE” www.sm-forex.com Money Management
  • The Forex Codes Money Management
    • This is the crux of the whole Workshop
    • Failure to employ sound money management principles will bust you no matter how good a trader you are!
    (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • The Forex Codes Money Management
    • Never risk more than 3% of your equity on any trade
    • This is not a get rich quick scheme
    • Protect your Equity at all costs!
    (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • The Forex Codes Money Management (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • The Forex Codes Money Management - Drawdown
    • If you have an equity pot of £10,000 and you lose £5,000 then you have a 50% drawdown
    • It is easy to lose money and hard to get it back
    (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • The Forex Codes Money Management - Drawdown (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • The Forex Codes Money Management - Drawdown
    • Typical Novice Scenario:
    • Account size; £5,000
    • Position Size: £10 per Pip
    • Risk: 30 Pip Stop Loss = £300 = 6%
    • First 2 trades win for profit of 12%. Greed and overconfidence makes you increase your risk
    • Next 5 trades lose at £15 per Pip = £2,250 losses
    • Available Equity: £5,600 - £2,250 = £3,350
    • Total Drawdown: 33%
    (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • The Forex Codes Money Management – Stop Size
    • Available Equity: £5,000 £10,000
    • Risk: 3% = £150 3% = £300
    • If your Stop Loss size is
    • 30 Pips then the maximum
    • trade position is
    • £150/30 = £5 a Pip
    • £300/30 = £10 a Pip
    (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • The Forex Codes Money Management – Stop Size
    • The 3% rule is an absolute maximum . Professional traders use less!!
    • Psychologically you can accept your losses better when they are small
    (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • The Forex Codes Leverage and Margin
    • Gearing or “leverage” is the power to control a lot with just a little.
    • With Forex trading $1,000 in your account can control a position value of $100,000!
    (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • The Forex Codes Leverage and Margin
    • A Standard Lot - $1,000 controls $100,000 . 1 pip = $10
    • A Mini Lot - $100 controls $10,000. 1 pip = $1
    (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • The Forex Codes Leverage and Margin
    • Margin is nothing more than the money that the broker requires you to maintain in your account before he will lend you money to trade.
    • When the broker closes your trade because you don’t have enough margin the term used is a Margin Call.
    (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • The Forex Codes Money Management
    • It is desirable to trade when you have a high risk to reward ratio.  The higher the ratio, the less you have to be right
    (C) Copyright 2006 Stephen Margison www.sm-forex.com
  • (C) Copyright 2006 Stephen Margison www.sm-forex.com “ IT’S TIME TO GET MORE OUT OF LIFE” www.sm-forex.com Money Management