Nial Fuller’s 5 Golden Rules of Forex Trading Money Management
Understanding how to implement Forex trading money management to grow your trading account is essential to the success of all traders. However, many beginning traders are largely unaware of some or most of the basic concepts of effective Forex money management, and this is a major reason why so many traders fail to make money over the long-term in the markets.
This article will cover five topics that every trader should be keenly aware of in order to grow their trading account as efficiently as possible. For more information on each of the five topics discussed below, check out the links contained within each topic. You should use this article as a starting point to understand Forex trading money management, and refer back to as needed to solidify your comprehension of each topic discussed.
How much should I risk on a trade?
I get a lot of emails from traders asking me how much they should risk per trade, or what percentage of their trading account they should risk per trade. Unfortunately, there is really no “concrete” answer to this question because there are a lot of variables that are different from one trader to the next. A good place to start when trying to determine how much to risk per trade is to honestly answering this question: how much money do you have as disposable income that you can realistically afford to lose?
I find that many beginning traders fund their trading accounts with money they really shouldn’t be risking in the markets, and if they don’t initially make this mistake, they make later down the road after blowing out their first account. So, first off, you should never risk any money in the markets that is not truly disposable, and by truly disposable I mean “fun money”, money you don’t need for any other purpose besides entertainment. I am not implying trading is entertainment, I am just trying to convey the point that you should only trade with money you truly do not need. Doing this will start you on an “even” emotional playing field, because you will have no emotional attachment to your trading money.
Next, when determining how much you should risk on a trade, always think in terms of dollars risked, not in pips. The notion that a trader should think in terms of pips instead of dollars is simply not conducive to effective Forex trading money management. Pips are basically irrelevant because one trader could risk the same amount of pips as another trader but they could have drastically different dollar amounts at risk, this is a result of position sizing and will be discussed below.
In my own personal approach I take a more discretionary approach to how much I will risk on any given trade, this is contrary to what the popular Forex web presence might say. I typically risk a set amount of dollars per trade, rather than a set risk percentage, this approach works for me because I have mastered my trading edge, which is price action, and so I know exactly what I am looking for in the markets. Also, because I trade with purely disposable income, I have no problem risking a set dollar amount on a price action trading setup that I feel 100% confident in. For more on this approach please click on the link in the previous paragraph.
Risk reward should be thought of as the “workhorse” of money management, the proper implementation of risk reward is how professional traders make money. Indeed, it is so powerful that you can even enter the market essentially randomly and not lose money over the long run, and perhaps even turn a small profit, through the proper execution of risk reward. For more on this idea see this article: A Case Study of Random Entry and Risk Reward in Forex Trading.
Unfortunately many traders take the wrong approach to risk reward by worrying first about the potential reward and last about the potential risk. You need to first calculate the risk involved on any potential trade setup AFTER you determine the most logical place to put your stop loss. Once you have done this, you then can determine what the potential reward is based on multiples of your dollar amount risked. So, if you risked $100 on a trade, you ideally want to aim for a reward of at least $200 or more; the R:R would be 1:2. The idea is that if you can make at least 2 times your risk on all your winning trades, you will, over a series of trades, offset your losers to the point of turning a decent profit. Obtaining a R:R of 1:2 or better even gives you the potential to lose on the majority of your trades and still make money. For more on the topic of risk reward see this article: Risk Reward: the Holy Grail of Forex Trading.
Many traders do not understand position sizing, but it is a very simple concept that you must understand if you want to effectively manage your money. Position sizing allows you to risk the same amount of money no matter what price action trading strategy you trade or how large or small your stop loss distance is. Some traders erroneously believe that by having a wider stop loss on a trade they are risking more money or that by having a smaller stop loss on a trade they are risking less money.
The truth of the matter is that you can adjust your position size up or down to meet the necessary stop loss distance. So, you first should determine the most logical place to put your stop on a trade setup, you never want to determine your position size first, this should always come AFTER you determine the best and safest place for your stop. After figuring out where to place your stop loss, you THEN calculate the number of lots you can trade to maintain your pre-determined risk amount. This is the correct way to maintain your risk on any trade; it is a basic but essential component to an effective Forex money management plan. For more on position sizing check out this article: Risk Reward & Position Sizing in Forex Trading.
How effective money management helps you manage your emotions
I often discuss the importance of managing your emotions while trading the Forex market. This is a very important factor of successful trading, but it is something that depends heavily on correct Forex trading money management. Put simply, if you don’t logically manage your money and risk on every single trade, it will be nearly impossible for you to manage your emotions effectively. There is a reinforcing loop between money management and emotion management, and it can go either way. For example, the better you manage your risk and money in the Forex market, the easier it becomes to manage your emotions, simply because if you are effectively managing your money you are unlikely to become emotional.
Conversely, if you do not take risk and money management seriously you are opening a can of “emotional” worms that will be very hard to contain. The temptations of over-trading and over-leveraging your trading account are very difficult to contain if you aren’t trading with truly disposable income or aren’t comfortable with the amount you are risking per trade. So, you see, you need to build your Forex trading money management plan on a solid foundation, and this starts with the concepts discussed previously of disposable income, risk / reward, and position sizing.
Master your Forex trading strategy
Finally, in order to truly exploit all of the above topics, you need to truly master your Forex trading strategy. As I discussed earlier under the “how much should I risk on a trade?” topic, the main reason that I am comfortable using a somewhat discretionary approach to risk amount is because I am 100% confident in my knowledge and awareness of my edge in the market; price action.
Experienced traders like myself know that trading less often than most amateurs is conducive to growing their trading account. Put simply, there is no reason to trade if there is no reason to trade. All of the above money management principals are best taken advantage of when you are confident in your trading strategy and have no doubts in your mind about what the market should look like before you risk your money in it. Essentially, domination of your chosen Forex trading strategy will tie all of the pieces of money management together and make them work in your favor. If you want to know more about how I trade the Forex market with simple price action trading strategies, check out my Price Action Forex trading course.
34 Comments Leave a Comment
GREAT ARTICLE AS USUAL NIAL… Love How Detailed And Descriptive You Were On The Topics. Thanks For The BREAKDOWN… And Thanks For The Information… GOD BLESS…
Am a fan of Nial
I didn’t know how powerful money management was until I landed on this site. Thank you Nial.
Thank you very much, Nial!
nice……………………again, I owe you much Niall
i think this is a favour in trading
Thanks for the great teaching aids. what does a typical trading journal look like
Thanks for the great teaching aids what goes a typical trading journal look like
Heavy readers will see that I give heavy praise (sincere!)to you and your course that I joined last week. Larry
powerful lesson on money mgt.
Nice lesson Nial. I get improved daily through your lesson. You’re really making impart. Thanks.
I have put the statement of ‘There is no reason to trade if there is no reason to trade’ on my monitor as a very important reminder.
Many many thanks
Great article, great site indeed. I’m for the first time here, but I think I’ll stay for a while;) And, I promise, as soon as I earn enough money trading forex using your approach, I’ll buy the access to your site:) Regards!
education comes first.. trading real money with no education could be fatal for your trading account.
great article,this is a must read for every aspiring fx trader,it realy deal with my present wrong perception about the market,i learned a lot from this article and it will always serve as a great reference to my trading, thanks Nial and happy belated birthday i wish you the best,have fun and enjoy yourself,you are highly blessed!
I decided to test your article back a month or two on
risk reward and trading by flipping a coin. I stopped trading with real money and went to demo trading only. For the month of Feb 2011 I traded price action setups and got 8 wins, 8 losses, for a net profit of 245 pips.
Did the same thing in March. I took every valid trade on demo and I got 13 wins, 6 losses, and made over 750 pips.
I see now that my fear of having a losing trade is what has held me back for so long. I now see that we all have losing trades and we just have to consider losses as part of the math which leads us to profit through risk reward.
Nice work mate.
A stroke of genius Nial.
This concise article distills the Laws of Trading which I have spent 4 years researching the world of FX. Fellow traders please take very careful attention of Nial’s wisdom. If you value your trading account and emotional equilibrium please read this article at least 10 times. I wish I had that opportunity 4 years ago.
You seriously have my attention!
nail, i must confess u are what forex is all about
A very good explanation of concepts which are vital to understand and apply if one is to have any chance of becoming a competent trader as opposed to just a gambler.
After two years of extensive reading and study you provide the best analysis and instruction I have seen.
So, may I say “Many thanks for your considerable efforts on our behalf” – on behalf of all of us.
I will definitely enroll on your course. If this is an example of what you are prepared to voluntarily provide for us then your course instruction must be very good indeed.
Many thanks for he excellent articles. I have been waiting
for all this time.
With your guiding articles, I am now mastering two forex trading strategies.
Excelent Article Nial. That is the piece i missed.
Nial is at it again, and this time it deserves 50 Stars. . . for constellation of wisdom in the man.
Thanx again today.
Thank you Nial
very important stuff. only trade money I can lose without any consequencies. another usefull article nial. thanks man.
advice is always spot on ! many thanks mate
As always I enjoy your articles, money management
has always been one of my weak points.
PS. like your PA trading style.
You have nicely illustrated the essence &
drawn the important aspect of the Price Action
for comfortable & non-emotional trading.
This should be read every day before pressing the “place order” button. I for one find myself playing
video game with my trading platform too often. This will
keep you on track.
Thanks for the great info.
You have showed a complex and lengthy topic in very simple words, and I think if someone is in search of Holy Grail than She/He should follow these lines with sincerity and without any doubt, and surely slowly & gradually he will get the enormous benefits for which someone can only fantasize. Good job Nial Fuller
” Put simply, there is no reason to trade if there is no reason to trade.”
Very witty phase!!! :) ;)
Nice article Nial – thanks for putting things down to the nitty gritty in trade management.
WHAT CAN I SAY , NIAL…ANOTHER PLATINUM HIT! Your lessons are the oil for my turning gears. Without them I truly think my progress wouldn’t be were it is now. My trading is going well because of your articles. Keep’em coming!