If you have read anything about trading, you have undoubtedly learned that money management is the key ingredient that most novice traders do not add to their trading recipe. While good money management cannot turn a losing trading strategy into a winning one, poor money management can easily turn a winning trading strategy into a losing one!
In the past, I struggled with money management, but now, with the help of my risk calculator, I find it fairly simple. Just like finding the right trade management techniques, proper money management can be learned and more importantly systematized.
I have developed a simple spreadsheet that calculates my RISK:REWARD ratio on each trade based upon my trade direction (long or short) entry price, profit targets and stop loss levels. Then, based upon my account size, the spreadsheet will let me know how many mini contracts I can trade based upon the RISK:REWARD ratio derived from the trade variables.
I also have a proprietary NinjaTrader indicator that makes this same calculation for me directly on the chart.
I base each trade on 1% of my overall account. However, I will scale this figure down or up based upon the RISK:REWARD ratio on the trade. Let’s say for example I am trading 3 lots, risking 25 pips on each contract for a total risk of 75 pips.
Because of my scaling out profit technique I will only potentially make 60 pips on the trade, this is a RISK: REWARD Ratio of 1.00 to 0.80. Most trading programs will tell you to pass on this trade, because the risk outweighs the reward. Because I have confidence in my indicators, I may take this trade, but instead of trading 1% of my overall account, I will trade 0.80%. This reduces my risk and lets me take the trade. If it works out, I have some extra cash in my account, if it fails, my trading account does not suffer all that much.
In this example, the 0.80% is the MAXIMUM risk I allow myself take on the trade. In reality, I will often take an even smaller position, sometimes only 3 contracts (allowing me to still employ my 3 tiered profit exit strategy.) I may also execute any remaining contracts allowed based on my risk:reward calculation, using them to improve my entry price if the trade moves temporarily against me.
I trade EUR/USD primarily and have an 80% profitable trade rate but the losers eat me up. Any help in money management would be greatly appreciated. Thanks
Hi Joseph,
If the losers are eating you up, I would guess that it is due to your risk:reward being way out of whack.
Ideally, traders want a 2:1 ratio, where they are making double on their trades vs. what they are risking. With the trend following entry system I use, I have always found this to be difficult to achieve.
To compensate, I use an Excel spreadsheet formula to adjust my position size down on trades with low risk:reward ratios. I can do this because I trade mini lots and because I have planned profit targets to scale out of my trades in thirds (first target 1/3 of contracts traded, second target 1/3 of original contracts trades and move stop loss to breakeven, final target 1/3 of original contracts traded to close the trade.)
Let’s say for example my account size is $33,500 and I am planning to go short on the GBPUSD at 1.5940, with targets of 1.5915, 1.5879 and 1.5843, with a stop loss of 1.5979. If I am risking 3% of my account on this trade (which is the MAX I would risk on any trade) I can trade up to 17 contracts. I would not enter the trade with 17 contracts however. Typically, I would enter with 1/2 of the allowable contracts on the trade, and then add to my position at key numbers (1.5950, 1.5955, 1.5960) if the trade starts to go against me. I am averaging my entry price and remaining within my allowable risk on the trade, as long as I do not exceed the original total of allowable contracts to trade (17 in this example.)
I will send you a copy of the spreadsheet via email and you can play with it. It will work for you on EURUSD as well as GBPUSD as long as you are willing to scale out of your trade in thirds.
Let me know if it helps you. Thanks for your post.
~Jim