SanDiegoMagaPede Trading Plan Lesson 2: Money Management

#Lesson 2: Money Management

The most important part of trading is most often the most overlooked by newer traders. Many people new to trading focus on trying to make as much money as possible, and logically they should, right? To succeed in Forex, making money is how you "Win" the game.

However, like with most games, traders begin to realize really quickly there are more "rules" to the game than scoring points. Many popular games also include a DEFENSIVE strategy as well. This defensive strategy protects you from LOSING the game. And in the rules of the FOREX GAME, a loss means losing money.

So what defensive strategy exists that can protect your account?

A simple money management system. This system tells you how you can how much of you account you can risk before a trade is even placed.

Many money management systems say that you should not risk anymore than 1% of your trading account per trade. (This system included) However most money management systems have a fatal flaw

You see they make risk based on the amount they want instead of what is actually in the account. What I mean is that people will trade a 10,000 account, lose 5,000 and still risk just as much as if they were trading with 10k. This is a recipe for disaster. So I made one simple change that made ALL the difference.

So instead of a static risk, I made it dynamic. Which means your capital risk goes up and down based on the amount of capital in your account.

So as your account grows that 1% risk will also grow, meaning bigger gains.

But more importantly, if you lose, that 1% risk will also shrink.

I call this concept...

#"The Dynamic Money Management System"

Your risk ALWAYS remains proportional to your account capital. So if you have $100,000 in your account you are allowed to risk $1,000 per trade. On the other end of the spectrum if you only have $1,000 in your account you are only allowed to risk $10.

#Why 1% risk? Why not 2% or even 5% risk?

This is a question you might be asking yourself at this point. I mean the more we risk the more we can make right? Well that is technically true, but what you are not seeing is that the more you risk, the more you can lose.... FASTER. I have personally lost 10 trades in a row in a real life trading account.

Statistically everyone who stays with forex long enough will have what I call "THE DEATH STREAK".

It is a series of trades were you lose 10 times or more in a row. Despite doing everything right, despite following your system, despite everything telling you that you should win. Forex is a "game" of probability and everyone once in a blue moon, probability and Forex turns its attention on YOU and attacks with a vengeance and tries to take you out.

Most traders do not survive this and are usually wiped out. Why? ....Poor money management strategy.

So lets get back to those original numbers. the 1%, 2% and 5% risk that I see so much on this sub. Lets do the math and times the risk times "The Death Streak". If you risk 1% per trade, the max your account would lose would be 10%. It sucks, but it ain't that bad. If you risk 2%, now you are down 20%! That stings a lot. However if you risk 5%, 10 losses in a row will drop your account down 50%! Half you account is wiped out in generally a week.

How can you make money on one end in Forex, while bleeding money out the other? The answer is you can't. You have to accept the bleeding WILL happen, plan in advance, and do your best to keep the bleeding at a minimum BEFORE it happens. So how well does this "Dynamic Money Management System" work?

Well I was able to simulate losing with a calculator by taking a $100,000 and multiplying it by 99% (Risk of 1% loss) and I was able to lose over 500 times in a row before I was wiped out. With a standard static money management system your account could be wiped out in 20 (5%) to 100 (1%) trades. I know that there is no way in hell that I will lose 500 times in a row (unless I really suck). This method will protect your account with the least amount of exposure to risk, while still offering enough up to make decent money.

So instead of telling you how to do the math I made an excel calculator you can download here

https://drive.google.com/file/d/0B492nwxk46rtU21Kb0o5UmZtbU0/view?usp=sharing

Open it up and I will show you how it works. (This is built for the Oanda Trading system)

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Step 1: Type in your Currency Pair

Step 2: Type in the amount of total capital in your account

Step 3: Type in the amount you are willing to risk (DONT GO ABOVE 1%. DO SO AT YOUR OWN RISK)

Step 4: Type in the amount of pips your trade set up is willing to risk

Step 5: Type in the value on a per pip. (type in 100 units in the trade desk and it will show you. Usually between 0.07 and 0.13)

Step 6: The number under "Max units to Trade" is the number you type into units when placing a trade in the Oanda trading system. (MAKE SURE YOUR PIPS RISKED ARE ALSO ACCURATE OR ELSE YOU THROW THIS OUT OF WHACK)

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As you account grows or shrinks you now have a calculator that will do your money management math for you and help protect your account in a dynamic way. All while still letting you risk enough to trade a decent amount. That's it. Don't go above 1% risk per trade. Stick with the Dynamic Money Management System and your account will be Extremely Protected and Resistant to losses!

Next time I talk about Risk Reward Ratio and winning percentage to victory.

Lesson 3: https://www.reddit.com/r/Forex/comments/6or3db/sandiegomagapede_trading_plan_lesson_3_risk_and/

Lesson 1: https://www.reddit.com/r/Forex/comments/6nbjjx/sandiegomagapede_trading_plan_lesson_1_setting/