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Money management is the most important and overlooked subject in trading!
In my opinion, the best money management system for Forex/Futures traders is outlined in great detail in Ryan Jones' book The Trading Game: Playing by the Numbers to Make Millions. In this book, he teaches 'Fixed Ratio' money management. This method, he argues, will help any trading system as long as it is profitable over time.
This is how to put the fixed ratio money management system into practice:
1. Start with the total number of dollars in your trading account. For example let's say it's 1000 USD.
2. Now pick how many pips profit you need to achieve before you trade with more lots. Let's say 200 pips (10 pips/day for 20 trading days in a month average).
3. Now start trading .1 mini lots (which is profit/loss 1 USD). You would only increase to .2 lots after gaining 200 pips. When you gain 200 more pips profit you would trade .3 lots etc...
4.Here is an example of how fixed ratio trading would work:
Month 1: $1000 + (200 pips x .1 lot = $200 ) Total: $1200
You start with $1000 in your trading account and after 1 month of trading you gain 200 pips profit trading .1 lots. You now have $1200 in your trading account. You are now at the next level. If your account balance falls below $1200 then you will go back to trading .1 lots.
Month 2: $1200 + (200 pips x .2 lots = $400) Total: $1600
You now start month two with $1200 and gain 200 pips profit trading .2 lots. You now have $1600 in your trading account. You are now on the next level. If your account falls below $1600 then you will go back to trading .2 lots.
Month 3: $1600 + (200 pips x .3 lots = $600) Total: $2200
You now start month three with $1600 and gain 200 pips profit trading .3 lots. You now have $2200 in your trading account. You are now on the next level. If your account falls below $2200 then you will go back to trading .3 lots.
Month 4: $2200 + (200 pips x .4 lots = $800) Total: $3000 You now start month four with $2200 and gain 200 pips profit trading .4 lots. You now have $3000 in your trading account. You are now on the next level. If your account falls below $3000 then you will go back to trading .4 lots.
Month 5: $3000 + (200 pips x .5 lots = $1000) Total: $4000
You now start month four with $3000 and gain 200 pips profit trading .5 lots. You now have $4000 in your trading account. You are now on the next level. If your account falls below $4000 then you will go back to trading .5 lots.
RESULTS:
Month 6: $4000 + (200 pips x .6 lots = $1200) Total: $5200 Month 7: $5200 + (200 pips x .7 lots = $1400) Total: $6600 Month 8: $6600 + (200 pips x .8 lots = $1600) Total: $8200 Month 9: $8200 + (200 pips x .9 lots = $1800) Total: $10000 Month 10:$10,000 + (200 pips x 1 lot = $2000) Total: $12000
Notice that gaining an average of 10 pips a day, along with fixed ratio money management helps your equity grow asymmetrically. Your $1000 turned into $12,000 in 10 months!
Notice that your trading system doesn't have to always hit a home run, you simply need to average 10 pips/day in this example.
If you wanted to be more conservative than the above example, you could simply add more pips profit in the formula. For example you could only increase number of lots traded after gaining 400 pips instead of 200 pips like in my example. This would mean slower growth. Try setting up a fixed ratio money management plan before you start your next live trade!
This unique approach to day trading the EUR/USD involves using financial Fractals and no other technical indicators, as outlined in the Euro Fractal Trading System.
About the author:
Cynthia Macy has been trading various markets for over 12 years but now concentrates on the forex market and is the co-author of 3 forex training ebooks.
For more comprehensive trading information, visit her other websites at:
http://www.professionalforextradingonline.info http://www.successtrading2000.com/forex http://www.shortterminvestingsite.com http://www.daytrade-forex.com http://www.daytradeforex.com/products.htm
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