Money management
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Amount of
Equity Lost
Amount of Return Necessary to Restore to Original Equity Value
25%
33%
50%
100%
75%
400%
90%
1000%
This table shows just how difficult it is to recover from a debilitating loss.

It is important to note that a trader would have to earn 100% on his or her capital - a feat accomplished by less than 1% of traders worldwide - just to break even on an account with a 50% loss. At 75% drawdown, the trader must quadruple his or her account just to bring it back to its original equity – a task beyond the abilities of the mere mortal!

While most traders are familiar with the figures above, they are routinely ignored. We hear stories of traders losing an entire lifetime’s worth of profits in a single trade gone wrong. This is more often than not a result of sloppy money management, with no hard stops and more than anything else due simply to a loss of discipline.

Money management is the critical difference between winners and losers. It has been proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year. Despite 60% winning odds, 95% of all traders will lose because of their poor money management. Money management is the most significant part of any trading system. Most of traders don't understand how important it is. Make sure you are NOT one of them.

It is vitally important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk your going to accept for this trade.

Firstly, you should understand the following term: Core equity
Core equity = Starting balance - Amount in open positions.

If you have a balance of 10,000$ and you enter a trade with 1,000$ then your core equity is 9,000$. If you enter another 1,000$ trade, your core equity will be 8,000$

This is very important to understand since your money management MUST depend on this equity.

The following model of money management provides the combination of a high annual return on investment while simultaneously limiting risk. The standard account that will be discussed is a 100,000$ account with 20:1 leverage . You can adapt this strategy to fit smaller or bigger trading accounts.

The strategy

Your risk per a trade should never exceed 3% per trade. It's better to adjust your risk to 1% or 2% the lower the better. If you are confident in your trading system then you can lever your risk up to a maximum of 3%

1% risk of a 100,000$ account = 1,000$

You should adjust your stop loss so that you never lose more than 1,000$ per a single trade.

If you are a short term trader and you place your stop loss 50 pips below/above your entry point .
50 pips = 1,000$
1 pips = 20$

The size of your trade should be adjusted so that you risk 20$/pip. With 20:1 leverage, your trade size will be 200,000$

If the trade is stopped, you will lose 1,000$ which is 1% of your balance.

This trade will require 10,000$ = 10% of your balance.

If you are a long term trader and you place your stop loss 200 pips below/above your entry point.
200 pips = 1,000$
1 pip = 5$

The size of your trade should be adjusted so that you risk 5$/pip. With 20:1 leverage, your trade size will be 50,000$

If the trade is stopped, you will lose 1,000$ which is 1% of your balance.

This trade will require 2,500$ = 2.5% of your balance.

This is just an example. Your equity and leverage provided by your broker may differ from this formula. The most important is to stick to the % risk rule. Never risk too much in one trade. It's a fatal mistake when a trader lose 2 or 3 trades in a row, then he may be overconfident that his next trade will be a winning one and he may add more money to this trade. This is how you can blow out your account in a short time! A disciplined trader will never let his emotions and greed control his decisions.