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Money Management in Forex – Money Management Is the Critical Part of Forex Trading


Money management in Forex trading is one of the most important problems of new and even advanced forex traders. Almost everybody can find a good trading system that can be profitable but something that causes the traders to lose and be negative at the end of the month, is lack of a proper money management strategy and discipline. Although money management is so important and critical, it is very easy to follow.

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Forex money management have several different aspects and stages and should be started from the very first stages of your live forex trading business which is opening your live trading account. We have a very simple rule that says “Never risk more than 2% of your money.” Most traders think that this rule should only be applied after having a live trading account and while they trade, but this is not true. This rule should be considered even when you want to open your live account. Lets say you have already practiced and demo traded enough and you feel confident enough to open your live account. And lets say you have a $20,000 saving. Would you open a $20,000 live account? Well, you can do that but what if you lose this money for any reason? For example your broker becomes bankrupt and closes the company and never pays your money back. Or you take a 20 lots position by mistake and you forget to set the stop loss. It goes against you for 100 pips and wipes out your account. You will not be able to start over, at least for a long time that you save some money. And this initial failure may have a bad impact on you and you may not think about forex trading anymore and you will lose the opportunity for good.

If $20,000 is the only money you have, you should open a $400 account, specially if that account will be your first live account. Or a $1000 account maximum, if you are confident enough that you have had enough practice and you know how to trade.

Therefore money management should be considered even before live trading and when you want to open your live account.

The second stage is when you want to choose the leverage of your account. Nowadays you can have even a 1:500 leverage but this leverage is too big for new traders and even experienced traders try to avoid it. A 1:200 leverage is acceptable. I do not want to talk about leverage in this article because this article has to be focused on money management but briefly, leverage is the facility that your broker gives you to enable you to manage bigger amount of money using a smaller amount of money. For example if a broker gives you a 1:1 leverage account, then when you want to buy 100,000 USD against Japanese Yen, you should have 100,000 USD in your account at least. But if a broker offers a 1:100 leverage, then you only need to have $1,000 to buy a 100,000 USD and so with a leverage of 1:500 you only need to have $200 to buy 100,000 USD.

So why having a big leverage like 1:500 is dangerous? Because you can trade a huge amount of money and if your trade goes against you, you lose all your money very easily. When you have a $400 account with a 1:500 leverage, if you buy 100,000 USD against JPY and it goes against you for 40 pips only, you will lose all your money and you can not trade anymore. Whereas if your account leverage was 1:100, you could buy maximum $20,000. If you trade $20,000 with a 40 pips stop loss and your trade hits your stop loss, you lose $80 but a 40 pips stop loss with a 100,000 USD position equals to $400. To risk $400, you should have a $20,000 account, not a $400 account because we are supposed to risk only 2% of our capital at any time, not 100% of it.

The third place that you have to consider money management, is where you want to take a position. Again, we should not risk more than 2% of our capital. This rule should be applied to the positions we take too. This is the most important stage of money management, which is very easy to apply. You just need to consider it and not to ignore it. Now the question is how you can trade while you are not risking more than 2% of the money you have in your account (your account balance).

Before I answer this question and before I teach you how to calculate your positions in the way that you don’t risk more 2% with any trade, I want to tell you something which is even more important: Stop Loss

Let me tell you something frankly and seriously. If you don’t set a proper stop loss for your trades, if you hate setting stop loss and if you set stop loss but you move it when you see it is about to be triggered, you will never become a forex trader BECAUSE you lose all the money you have and you will not be able to trade anymore. Do yourself and your money a favor: Stay away from forex market if you don’t like to have stop loss for your trades. I can not emphasize on the importance of stop loss more than this.

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Setting a proper stop loss for each trade, is a different story. Some traders always consider a constant number of pips for their stop loss positions but this is not correct. Stop loss value can be different from time frame to time frame, currency pair to current pair and trade setup to trade setup. Stop loss that I choose for a position which is taken based on a trade setup on daily chart, has to be much bigger than the stop loss I have, when I trade using a 15min chart. Accordingly the stop loss I have when I trade EUR-GBP is different than the stop loss I set for GBP-JPY.

How to set a proper stop loss (and target) is something that has to be discussed in a different article. I have already published an article about this subject: Where Is the Best Place for Stop Loss and Limit Orders?

Ok! Lets get back to our money management discussion. So the third stage of money management is when you want to take a position. The rule says never risk more than 2% of your capital in each trade. It means if you take a position and it goes against you and triggers your stop loss, you should only lose 2% of your account balance. For example if you have a $10,000 account, you should only risk $200 in each trade. No matter what position you take and how big your stop loss is in different positions. You should choose the “position size” in the way that if your stop loss becomes triggered in any position, you lose 2% of your account. For example if you find a trade setup on EUR-USD daily chart that has to have a 150 pips stop loss. This 150 pips should equal to $200. Accordingly, a 20 pips stop loss on 5min chart should also equals to $200 which is 2% of your account. Easy to understand so far, right? 🙂

Before I show you how you can calculate your position size, let me tell you another thing. If a position goes against you and you feel stressed out and you down on your knees and start praying and begging God to return the market and you can get out at breakeven, it means: You have traded with the money that you can not afford to lose and if you lose it, you will be in trouble. And you have taken too much risk in your trade and you have not followed money management rules. And you have not set a stop loss and your account is so close to become margin called. If you trade like this, you should know that this is not trading. It is something else. And if by any chance, market returns and you can get out at breakeven in one trade, you will be trapped in another trade and you will lose all your money. But if you follow money management rules and you don’t risk more than 2% of you money in each trade and you set a proper stop loss, when your stop loss becomes triggered you will say, “Well! this is part of the game too. Not all my positions are supposed to hit the target.”

Now I show you how easy it is to calculate your position size. Lets say you have a $10,000 account and you have found a trade setup with EUR-USD which has to have a 100 pips stop loss. This 100 pips stop loss should equal to 2% of your capital, based on money management rule that says you should not risk more than 2% of your capital in each trade.

2% of $10,000 is $200:

$10,000 x 0.02 = $200

Now tell me if 100 pips should equal to $200, what value each pip should have? That is right. Each pip should equal to $2:

$200 / 100 pips = $2

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So to risk only 2% of your money in this trade, your position size (the amount of money that you trade) should be chosen in the way that each pip equals $2.

Now the question is how much EUR-USD you should trade if you want each pip to equal $2?

This question refers to pip value of each currency pair. One lot is 100,000 units of a currency in forex world. For example when you buy one lot EUR-USD, it means you have bought 100,000 Euro against USD. If you buy 0.1 lot EUR-USD, it means you have bought 10,000 Euro against USD and so on…

Each currency pair has a different pip value. Pip value can be calculated but you don’t have to learn how to do it because it is a little complicated with some currency pairs. Also, you don’t have to know the exact pip value of each currency pair to calculate your position size. You only need to know that one lot EUR-USD, GBP-USD, USD-JPY and USD-CHF has a $10 pip value (sometimes a little higher and sometimes a little lower). Pip value of one lot GBP-JPY, EUR-JPY, AUD-USD and USD-CAD is almost $10 too. EUR-GBP has the highest pip value among currency pairs. It is almost twice of the pip value of EUR-USD. And pip value of exotic currency pairs like USD-DKK, USD-SEK and USD-NOK is about 0.1 pip value of EUR-USD. Pip value of each current pair, changes with the price change but it doesn’t change too much to affect our position size calculation. For example pip value of one lot EUR-USD, sometimes is a little higher and sometimes a little lower than $10.

Don’t worry. You don’t have to memorize them. I will give you a calculator at the end of this article that can easily calculates your position size. I will also give you a pip value calculator. But before that, I just want to make sure that you understand how to calculate your position size manually.

Back to our question, how much EUR-USD you should trade that each pip equals $2:

It is now very easy to answer. Each pip equals $10 when you trade one lot EUR-USD. So you should trade 0.2 lot if you want each pip of your position to equal $2. It can be calculated through a simple equation:

Forex Money Management

What if you had a 100,000 USD account and you had found a EUR-USD trade setup which its stop loss had to be 200 pips?

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Now you can answer it right away: 2% of a 100,000 USD account is $2,000. When a 200 pips stop loss has to equal $2000, each pip value will be $10:

$2000 / 200 = $10

So the pip value of your trade should be $10 and your position should be a one lot position.

Another example: If you had a $20,000 account and you had found a EUR-GBP trade setup with a 90 pips stop loss, how much your position would have to be not to risk more than 2% of your capital?

Answer: 2% of a $20,000 account is $400. When a 90 pips stop loss should equal $400, the pip value of your position should be $4.4:

$400 / 90 = $4.4

One lot EUR-GBP has a $20 pip value. So you should take a 0.22 lot position:

$4.4 / $20 = 0.22 lot

Now that you have learned to calculate your position size, you can use the below position size calculator, whenever you want to take a position. It saves you some time.

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In case you like to calculate the pip value of currency pairs, here is a pip value calculator:

This was about calculating your position size based on the stop loss you should have for each trade. But what about target? What should be your trades’ target size?

Most traders say, your target size should be at least the same size as your stop loss, if not bigger. But choosing the target is also dependent on the trade setup you have found. When you have found a long position, you should be able to find the next resistance level that may stop the price from going up. That level will be your target. Accordingly, when you find a short trade setup, you should be able to find the next support level that may prevent the price from going down. That level will be your target. Then if you see your target will be smaller than your stop loss, you should ignore that position and you should wait for another trade setup.

Another strategy that helps you to make more profit and protect the profit you make, is splitting your position into two or even three parts and have a different target for each part. For example you find a trade setup and based on risk calculation, you have to take a 2 lots position. Your position target should also be 100 pips. You can take two one lot positions with the same stop loss, but for the first position you set a 50 pips target and for the second position you set a 100 pips target. When the first position target is triggered, you move the stop loss of the second position to breakeven (entry price). Therefore, if it goes against you after triggering the first target, your second position will be closed with zero loss and you have already made a 50 pips profit with the first position. If you don’t do this and just take a 2 lots position and and let your stop loss to stay at its initial position until your target becomes triggered, it is possible that it goes against you at the middle of the way and hits your stop loss.

Some traders are against this strategy. They say if you are confident enough about your trading system and if you have picked a good signal, let your target to be triggered with the full amount of your trade. This is also true. However, you’d better to move your stop loss to breakeven when the price has passed 80% of the way toward your target.

Another method is that you take two positions with the same stop loss, but for the first position you place the full target and you don’t set any target for the second position. When the first target is triggered, you just move the stop loss to breakeven for the second position and as long as the position keeps on moving to your favorite direction you hold the position and move your stop loss, candlestick by candlestick or 100 pips by 100 pips (in this example). This is a good method for maximizing your profit.

This article was supposed to be focused on money management. But what is the relation of maximizing your profit and money management?

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Maximizing your profit is an important part of money management. If you succeed to maximize your profit in your trades, you will have a better risk-reward ratio. When your stop loss is the same as your target, you have a 1:1 risk-reward ratio, but when you succeed to maximize your profit in a trade and your profit becomes three times more than your stop loss, then your risk-reward ratio will be 1:3. It means you have risked 2% of your account to make a 6% profit. And if one of your positions hits your stop loss, you lose 2% of the profit you have made and 4% of the profit is still in your account. Now lets say you have a trading system that you are 70% successful with it. It means 7 out of 10 positions you take, hit the target and 3 positions hit the stop loss. If you succeed to maximize your profit up to three times of your stop loss with those 7 positions, you will make 7 x 3 x 2% or 42% profit and your loss will be 3 x 2% or 6%. So you will have a 36% profit at the end (42% – 6% = 36%). This is a great result.

However you should know that it is not always possible to maximize your profit like that and in fact maximizing profit is one of the hardest part of trading and needs a lot of experience, patience and discipline.

Ok! I think I have talked enough about money management and its important role in trading. I hope you always consider money management rules in your trading. If you think 2% risk in each trade is too small, you can increase it to 4% only if you are confident enough about your system and your skill. I said “confident”, not “over-confident”.

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LuckScout
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"Whether you think you can, or you think you cannot, you are right." - Henry Ford

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49 thoughts on “Money Management in Forex – Money Management Is the Critical Part of Forex Trading
  1. satti says:

    Few months ago, a forex broker called and convince me to open a VIP account with his company. After few calls I agreed and open account with USD 10,000. I got no experience and lack of exposure too. The broker didn’t explain about forex or his demo account. He just rushing me and promise to assist me when trading. So I felt safe. First 3 days was profitable and it boost up my interest in trading. I didn’t realize the game is not only winning but huge lost too until the broker misguided me and I lost my deposit just like that. I was shocked and broker asked me to top up my account so he can guide me again. This happens for the third time too. Only now I am reading about trading and I understood the broker’s approach is wrong. Now I finally decided not to depend on broker and want to trade by myself confidently but still in nervous position. I just need some genuine advice as my balance left USD 4,000. Please advise how I should manage my trading account. Thanks.

  2. Singh says:

    Hi Chris,

    Thanks much for the article, One question :
    If I am thinking about making 20%-25% monthly and I have 2% risk stop loss per trade, how much maximum leverage do you think make sense ?

    • LuckScout LuckScout says:

      Hi Singh,

      If your broker is a real ECN/STP, then they should not be able to offer a leverage higher than 100:1. For a 2% risk, 100:1 leverage is enough.

      • Singh says:

        Hi Chris,

        I was expecting you will say maximum of 1:5 or 1:10 because 2% risk will amplify with higher leverage. Example :

        Total Deposit : $2000
        Chart : EUR/USD
        Stop loss : 100 pips ( regular risk for Weekly chart )
        Leverage : 1:10 ( $20K lot )

        In this case, one pip is $2. Then I am forced to take 10% risk or have leverage very small like 1:2 or 1:3

        This dilemma is always there, we need higher leverage to make good money but at the same time for stop loss we have to make it more than 2% ( like 10% or so )

        What is your recommendation ?

        • LuckScout LuckScout says:

          Hi Singh, Leverage doesn’t matter at all when you know how much risk you want to take. Also leverage has nothing to do with pip value and position size. A 2% risk is a 2% risk with a 500:1 or a 100:1 leverage. The position size and the stop loss will be the same with both leverage levels.

  3. Singh says:

    Thanks Chris

  4. Alejandro O, Bastida says:

    Thank you very much Chris for your another very important inputs and to those who give their comments…….

  5. Ted says:

    Thank you Chris.

    I understand that this part of forex trading is the most critical part. You explain it very well in easy to understand fashion. I will try to follow the rules. Still reading and demo trading. Thanks for all the info. Look after yourself Chris!! We still need you!! I do not know what we did to deserve someone like you. God must be smiling down on us!!

  6. Parson says:

    Hi Chris,
    Lets say I have a $100,000 account and my risk is 2%. then I can open 1 lot position with 20 pips stop loss. So, does it limit only 1 currency cross position per trade? Or if i want to open both euusd and usdjpy, do I have to split the lot size into half? Lets say 0.5 euusd and 0.5 usdjpy?

    Thank you
    Parson

    • LuckScout LuckScout says:

      Hi Parson,

      With a $100k account you can take a one lot position with 200 pips stop loss if you want to take a 2% risk only.

      You can take 2% risk per each position of course while the currency pairs are not correlated.

      • Parson says:

        Thank you so much Chris. Your answer really clarifies me a lot.

        • LuckScout LuckScout says:

          You are welcome.

        • Mike says:

          Hi Chris,

          I am wondering about the correlation of currency when we do trade set up. Is it not right to trade those currency pairs that are correlated such as GBP/JPY, AUD,JPY, and EUR/JPY at the same time, when they are all formed relatively strong signal?

          I understand that since they are positively correlated, it is similar to trading one currency pair with a larger position. However, if we are based on statistics,and let’s say that the trade set up has 70% probability of success. it is not necessary that they will all fail because they are not perfectly correlated(correlation of 1).

          Thus, if we long those 3, we could possibly end up with win 2 and lose 1 as long as stick to the rules.

          Regards,

          Mike

          • LuckScout LuckScout says:

            Hi Mike,

            A good way to prevent confusion is that we take the one that shows the strongest setup. Although they are positively correlated as you mentioned, experience has proved that the one that has formed the strongest setup will move better. For example, few days ago AUD/CAD and GBP/CAD formed both formed strong short setups, but GBP/CAD is doing much better because its setup was much stronger.

            The other option is that when they all form too strong setups, we take all of them, but later we hold the one that is doing better than the others.

          • Mike says:

            Thank you Chris. I really appreciate your answer.

  7. Randy Goldman says:

    This article is absolutely spot-on. In the scenario you lay out, I even support the 2% risk rule. I would also add that until you have at least 2000 practice trades executed, results recorded and analyzed, you are not ready to go live.
    But if every hopeful trader will print this article and use these rules to protect their cash, they will be able to persevere. Retail forex trading is about keeping your trading account VIABLE. That keeps you in the proper frame of mind and keeps your emotions under control. This article touches on all of the cornerstones to building a strong foundation for a successful trading career.

  8. toh says:

    Hi Chris,

    I m demo trading by using BB and candle for 6 months now, my trade result is 50-80% per each month.

    Please advise if i open real account at 5,000 usd I should plan gain profit % same as demo account or 5-10% ?

    I entry strong set up only and analyze chart 30-1 hr of Asian session.

    Thank very much in advance

    Toh

    • LuckScout LuckScout says:

      Hi Toh,

      This is a great result. Congratulations!

      If you have been repeating this 50-80% profit every month for 6 consecutive months, then you are ready to start live trading, but you have to start with an as small as possible live account. You have to treat it exactly like a demo account. Your live account balance has to be too small, so that you can easily forget that it is a live account and you can trade it like a demo account.

      If you have been able to make 50-80% profit with your demo account every month, there is no point to limit yourself to 5-10% with your live account. If you feel “fear” when taking positions with your live account, then there is something wrong. For example, you are trading with the money you cannot afford to lose.

      Stick to your trading system and set your stop loss order religiously with your live account, exactly the same as you have been doing with your demo account.

      Good luck 🙂

      • Toh says:

        Got it,

        Thank you very much for gain my confidence on live account. Will open 1,000 usd live account and follow same system method of demo.

        Cheer!

  9. CY says:

    Hi Chris,
    You did mentioned one of the strategy is to have 2~3 position for strong set up. If the trade should not risk more than 2% of your capital in each trade. Does it means, I need split the risk across the few position I take or it will be counted as 2% for each position I trade?

    If let say based on the calculation above: Let say 2% risk equivalent to 0.1 lot. Does it means by having two position, I will have 0.05 lot each? Or I shall trade each two position with 0.1 lot.

    Thanks.

  10. Roger says:

    Thank you so much for your clear explanation. Really i suffered a lot to understand this. Now every thing is clear for me.

  11. Ahmad Sobeih Ahmad Sobeih says:

    that’s a crucial article

  12. Mauer C Mauer C says:

    Hello Chris

    Let’s say I have an $1000 account. I open a position with that money and risk 2%. The trade setup needs 100 pips SL.
    (SL is $20. Each pip is $0,2.)

    But how should I calculate if I use leverage 1:10? Can I still have 100 pips SL and lose only $20 with 2% risk?

    Thank you!

  13. Smart Guy Smart Guy says:

    Thank you for the article. If I have a 1000usd account and I have a 2% risk i.e 20usd and my stop loss is triggered meaning I now have 980usd. If am taking another position do I use the new 980usd to calculate my risk or my initial 1000usd. I thinkbits the new 980usd but I will like your opinion. Thank you.

  14. Smart Guy Smart Guy says:

    Please Chris whats is the pip value for gold and silver as I intend trading them too. Thanks.

  15. Smart Guy Smart Guy says:

    Ok. Thanks so much for the good work you are doing.

  16. Elahe Ordoni Elahe Ordoni says:

    Hi there
    before every thing thank you for all your great articles. I have read all the steps until this one.

    I’m a bit confused in this article. can u help me?

    For example:
    my account is : $100
    stop loss is : 80 pips (ofcorse I know its not a good setup 😀 )
    so my position size should be 0.003 lot. (I should lost maximum %2)

    my question is: What is the Leverage rule in this plan?!

    Thanks

  17. Elahe Ordoni Elahe Ordoni says:

    Thank you for your reply Chris,

    But I dont know which leverage I should choose for $1000 Account yet. 1:200 for each account? Its not related to money management at all?

    • LuckScout LuckScout says:

      You are welcome.

      Is it a demo or a live account?

      • Elahe Ordoni Elahe Ordoni says:

        in both.
        My principle question about this article is:

        When the money management dosent allow us to take more than an specific position size, why should we need to leverage for getting more lots? is the reason taking more setups? I wish to find 3-5 per months, so I think we dont need to leverage! Can you clear me?

        and if we need, which leverage is sutible for novice in real or demo account with small size.

        Thank you.

        • LuckScout LuckScout says:

          Elahe,

          Money management is related to risk. For example when you take a 2% risk, it means you will lose 2% of your account if your position hits the stop loss. You have to set your position size based on the risk you want to take. Leverage gives you more freedom in choosing your position size.

  18. Hi chris,
    Greetings from Egypt, I am very impressed with the info provided and the explanation of the system.

    I use the double Bollinger bands introduced by Kamal, since I prefer to make my trading simple as possible. I read the money management & risk/reward articles many times, in addition to the comments above but couldn’t find final steps guide to make the trade.

    Please confirm if this is the summery of the rules:

    An account of 10’000 USD , a LONG set up shows on ( eur/usd ) according to Double Bollinger bands ( Qualifications: candle 1st & 2nd close above middle BB line , 3rd candle closes above 1st BB line )

    Step one: Calculate stop loss based on 3rd candle “low & closing price “i.e (120 Pips)

    Step two: Calculate 2 % of the CURRENT cash balance (10’000 X 2%) = 200 USD

    Step three: calculate the pip value (200 USD / 120 Pips) = 1.67 USD, therefore lot size on a standard account will be: 0.167 Lot

    Step Four: place 2 positions

    *Position one ( 1:3 risk ratio ) : SL 120 Pips , TP ( SL 120 pips X 3 ) 360 Pip , Lot size 0.167 Lot

    *Position two: SL 120 Pips, No TP target, lot Size 0.167 Lot

    Move stop loss (120 Pips) on both positions on every 120 Pips achievements in the market.

    Please confirm the above !

    On other hand ,

    Q 1: should I take 2% each position as above, or divide the opportunity (0.167 / 2) and allocate 0.08 each?

    Q2: incase the market achieved 240 pips ( both positions in action ) and a candle closes below the high 1BB as per Kamal instructions it is time to close , should I : ignore , close the no target position , close both , a safety net of 120 pip stop loss is there already wait on both ?

    Q3: incase I have 2 other pairs with 4 orders in action and both pairs order’s still floating , how many more trades I may add or consider ?

    Thank you in advance , Chris

    Feras

  19. hello guys i found a nice script to calculate the right lotsize for your account. you can adjust % you want here is the link to install it and the downloads

    http://www.forexfactory.com/showthread.php?t=281772

  20. Hello Chris

    I would like to find out how to mange if you trading a small account.

    For example: I have 350 USD and I only want to risk 2% and my stop loss is 80pips
    Am I right by saying that I will trade 0.0875 lots?

  21. Ivan Todorov Ivan Todorov says:

    I read this article quite time ago and now I`m facing problem with pip value of the metals. Would you please reveal how to measure it? Thanks a lot. 🙂


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