My Thoughts on Correct Trading Money Management
I’ve written a few articles on the topic of money management and the main idea I try to convey is that it’s arbitrary for someone to trade a percentage of their account. There are many factors affecting how any one trader should manage his or her money in the market; net worth, personal trading skill and confidence, risk tolerance, etc., the point is that every trader is different and has different circumstances that dictate the best way for them to manage their money.
Due to these varying circumstances between traders, it simply makes no sense to recommend (as many ‘experts’ do) that traders risk 2% or some other percentage of their account. My approach to money management is a much more personal one as I believe each trader’s money management plan should vary depending on their individual circumstances.
Why you shouldn’t risk a fixed % of your account
Let’s assume for a moment that you have a 50% drawdown on your trading account, not unheard of even for a professional trader. If you have such a drawdown and you are risking 2% on every trade, it’s going to take you an extremely long time to build your account back to where it was. If you lose 50% of your account, you need to make a 100% gain on it just to recover that loss, and risking 2% per trade is not how a professional would recover from such a loss, because it would take virtually forever.
If you are a skilled and confident trader, why would you relegate yourself to risking only 2% on every trade you take? Perhaps if you are a day-trader who enters many positions per day this 2% approach might make sense, but as I discussed in my article on why I hate day trading, I am not a day trader and I do not teach or condone day trading.
The way that I trade and the way I teach my students to trade is to take a very patient, sniper-like approach so that we are not over-trading. Instead, we may only take a small handful of trades each month, but we feel confident about those trades and as a result, we give ourselves a chance of making a nice profit on them.
For example, if you risk 2% per trade and let’s say you take 25 trades per month, you have effectively risked 50% of your account that month (2% x 25). Alternatively, if you risked say 10% of your account on just 3 trades per month, that would only be 30%. This is a crude example perhaps, but my point is multi-faceted:
1. There simply aren’t many high-probability trading opportunities that arise on any given month in the market. If you are trading very often as in my first example above, you are over-trading and unnecessarily risking your money in the market, essentially you’re gambling.
2. If we instead trade less frequently but perhaps trade a bigger position size when we do trade, we are giving ourselves a much better opportunity to make money while reducing our stress, frustration and ‘gamblers’ mentality. This obviously assumes that you know how to trade properly and you know what your trading edge is and you are sticking to it/ waiting patiently for it to arise.
Now, before anyone jumps to conclusions from my example above, I am not necessarily condoning you risk ‘10%’ of your account per trade. My point was to show that trading less frequently but more precisely and skilled, can allow you to be confident because you know you will risk a decent position size on the trades you do take. Many people feel if they trade daily charts and swing trade them that they are ‘missing out’ on opportunities because they may not be in the market everyday like a day trader, but what I am trying to show you is that this is an erroneous way to think about trading.
The proper way to think about trading and specifically money management, is that trading less but more precise and disciplined will give you plenty of opportunity to make ‘a lot’ of money, you just have to have the patience and mental fortitude to make it all work.
You need to protect your money from yourself
One of the most important aspects of proper money management as a trader is protecting your money. More specifically, I’m talking about protecting your money from the risks of trading too frequently or gambling in the market.
It can be extremely tempting to jump back into the market after you have a winning trade. In fact, I’ve found that it seems to be almost an innate human tendency to become overly-focused on finding ‘another trading opportunity’ right after winning a trade. Your defenses go down after a win, as does your overall perception of how risky trading really is. In essence, a winning trade can lull us into a sense of complacency to a certain degree.
As a trader whose number one goal is to protect their money and get the most out of it in the market, you have to be very vigilant after a winning trade so that you don’t lose the discipline that probably brought you that winning trade in the first place.
There is no worse feeling than giving back all the profits you just made on a trade that you patiently held for multiple because you jumped in and out of the market a bunch of times the very next day. One of the best ways to protect your money is by sticking to your trading strategy no matter if you’ve just won or lost on a trade, and not letting the results of your previous trades influence your next trade.
Your trading account is a margin account
Due to the fact that a Forex trading account or similarly, a futures trading account, is highly leveraged, there is no need to keep all of you trading money in the account or calculate your risk per trade based on a percentage of that account.
To compare, take a stock trading account for example. A stock trading account is not leveraged in the same way a Forex or futures trading account is. For that reason, you do need to keep most or all of your trading money in a stock trading account, and it’s not a ‘margin account’ like Forex or futures.
Margin means you can control a much larger value of currency or commodity than what you could buy with the money you have on hand, and leverage is what allows this to happen. For example, to control say $100,000 worth of currency, or 1 standard lot, you only need about $1,000 in your trading account with 100:1 margin ratio or ‘leverage’.
So, as you can see, when trading a highly leverage instrument like Forex, we do not need to keep all our trading money in our account, so it makes no sense to calculate our risk based off our ‘account size’. Instead, I propose a much more personal and perhaps intuitive way to determine how much to risk per trade…
So, how much should I risk per trade?
I probably get this question of ‘how much to risk per trade’ or ‘how much to fund my account with’, more than any other on the email support line.
The answer is much simpler than what you might currently believe. I believe in determining a dollar amount that you are comfortable with losing on any one trade, and sticking to that dollar amount at least until you have doubled or tripled your account, at which time you can consider increasing it.
This amount should be an amount that satisfies the following requirements:
1. When risking this dollar amount, you can sleep sound at night without worrying about trades or checking on them from your phone or other device.
2. When risking this dollar amount, you are not glued to your computer screens becoming emotional at every tick for or against your position.
3. When risking this amount, you should be able to almost ‘forget’ about your trade for a day or two at a time if you have to…and NOT be surprised by the outcome when you check on your trade again. Think, ‘set and forget‘.
4.When risking this amount, you should be able to comfortably take 10 consecutive losses as a buffer, without experiencing significant emotional or financial pain. Not that you would IF you’re sticking to an effective trading strategy like my price action strategies, but it’s important you allow that much buffer for psychological reasons.
In summary, money management should not be based on some arbitrary percentage of your overall trading capital. Rather, it will and should vary from trader to trader depending on things like your net worth, trading skill and confidence and your tolerance for risk on a per-trade basis. As these things vary from person to person / trader to trader, the amount of money that you risk in the market and the amount you risk on any given trade, has to be an amount that works for your personal situation. Most importantly, and if you remember nothing else from this lesson, your risk should never exceed what you are mentally and emotionally OK with potentially losing on any given trade.
Remember to leave a comment below and please don’t hesitate to email me here with any questions or concerns you may have.
34 Comments Leave a Comment
This has solved 30%of my problems, may God bless you dearly.
Risking a percentage of the account on a trade is a fixed fractional money management method. And I agree, it is inefficient, and it will take a long time to build the account using it. In my previous trading life I used fixed ratio money management, where you increase the number of contracts according to the points earned. In essence, the idea is as follows. As it relates to futures, you start trading one contract with the capital which is at least twice the margin required. At the beginning you trade one contract, and your risk will be quite low. As the account grows the risk increases exponentially. In essence, most of your risk now is with the “market money”, the money you made. In short, you increase the size by one contract once you make a predetermined number of points. Let’s say it is 5,000. So once you made 5,000 points on your initial capital you trade two contracts. In order to increase the size to three contracts you have to make 5000 points per contract, or 10,000. From three to four contracts – 15,000 points. So the risk increases sharply at the beginning but as you reach 5 – contracts it start levelling off. Moreover, when the strategy hits a drawdown you can decrease the number of contracts faster than you increased it. Eventually, when the account grows to a significant number it becomes feasible to switch to the fixed fractional method.
I used it successfully trading South African index futures, and my account grew dramatically twice. Both times I gave the profits back to the market, both times because I violated the rules of the money management.
excellent article! everything is clear and clear
Nice written. ..I love this.
Personally, I don’t like risking 2%, because I will end up risking my whole account.
Sometimes risk management is determined by the market condition.
Just like you said, depending on skill,meaning. ..if I am loosing money, market condition will tell me if I should exit the position or not, but if you don’t have these skills, you won’t know what to do at a time when market went against you. If you build your skills in trading,seriously it will ease your stress and it will kill you emotions.
Nial “your risk should never exceed what you are mentally and emotionally OK with potentially losing on any given trade” A superb and simple statement on money management.
Nial Sir After reading your few article I feel mentally strong , confidant and disciplined to trade.
Thank you very much for your time and patience in writing such article at free of cost to the world of traders.
what is your idea about taking inside day pattern formed on 4h time frames ?basicly ,is it good idea to take any possition based on 4h time frames?
One again your article is quite elucidating, clearing so many grey areas on a wide range of Forex Trading issues.
I have read your previous articles on Money Management Principles in Forex and I decided to adopt it.It literally removed all uncertainties I had then concerning “How much to risk per Trade”. This current article is a further confirmation that your convictions and teachings on Money Management remains unchanged to date.I am greatly encouraged and enriched thereby.Thank you and God bless.
Hi Nial, you are always on point man thanks a lot
As usual the peak of the pack article It has really cleared the fog Damned the ‘experts’!
Nail you hit the nail right on the head
You hit the psychological distress of a trader like reading my mind.
Awesome. Something unconventional yet immensely powerful.
Thanks again Niall for that timely focus that draws me up short just as I’m about to wing it (& outside my rules) again. Doooh.! Love your posts/reminders/support & the challenge of trading well!
Thanks Nial its really clear now
Thanks Nial – wonderful reinforcement – appreciated – clear and concise – always worth the read.
Thank you so much for making your followers really feel your personal ‘soul’ in forex trading.
Nice article. Helpful to avoid overtrading and reduce the fear of loss.
Nice article. Especially the part about selection criteria for risk amount.
But i think the amount you risk should also be big enough that if you win, say 2 x risk you should feel something, a little excitement. If you risk enough but not too much it will make your trading more focused. Well this is just my personal experience.
Thanks Nial, I think you’re the best in explaining trading psycology and money management; nobody else can go inside the problems and their solutions as you.
Nial the content you provide to your readers is unmatched and cannot be found anywhere on the net. i really appreciate your efforts in trying to teach newbies the basic tenants of trading. your style is very simplistic and easy to absorb by any newcomer. keep the good work up. on a personal note my trading changed once i read the material on your site which clearly shows the words spoken by a true mentor. thanks again.
These rules should be ingrained in our minds thoroughly for applying these in
practical situations without giving importance to the emotional pressures,
so that we will patiently wait to see for ONLY the solid set ups with good risk-reward ratio.
Thanks NIAL SIR !
Great Article as always Nial
Mr. Nial Fuller as usual you are on point your money management skills are excellent and trading strategy is also excellent. Keep up the good work of sharing your knowledge it really means a lot to us new traders.
You may as well have been writing about my experience this past week! I made the biggest profit since I started trading using your technique. I had been watching this set up for weeks. I got rewarded well. Till I got into trades that had no edge and gave it all back. :-(
I can’t thank you enough for these free letters that that contains lectures that money can’t buy.
It’s really helping rebuild my account.
very good article thanks for explaining it in ‘laymans terms’! This is the sort of strategy I use and when I trade I am relaxed and don’t worry about the outcome as I am not over burdoning myself financially. This method works and I highly recommend it
Hmmm,i find your articles always essential and helpful.Your experience really, is higly beneficial and it keeps one in the right direction.
Thanks Nial! You can never stress this enough. It is indeed the most important aspect in trading.
“I’ve found that it seems to be almost an innate human tendency to become overly-focused on finding ‘another trading opportunity’ right after winning a trade. Your defenses go down after a win, as does your overall perception of how risky trading really is. In essence, a winning trade can lull us into a sense of complacency to a certain degree.”
Its seems that above paragraph directly applies on me… Thanks….
Awesome as usual!!!
Thank you Nial for all of the lessons and guidance you always gives us. I am starting to get an idea of how to make a positive direction on trading successful. But, I’m still trying to learn more about becoming a good trader one day.
On the dot
how would you apply your ideas to trading long on stocks? Currently I pick a stop loss position just below a previous low, then using the difference between the current price and my stop loss price I work out how many shares I can buy with a 0.75% stop loss amount of my total portfolio. If it is OK I’ll do what you told me not to do, buy 2%, if it goes up I’ll buy another 2% but the total will never be more than 6%. My stop loss is a trailing chandelier type. I find it (a) hard to not get out on bad news even though the SL hasn’t been breached eg US Election result and (b) if I am taken out I don’t wait long enough to see if the trend is re-established hence too much trading and brokerage.