HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

Money Management


Naeem Aslam   Written by Naeem Aslam

Although you may think the title of Money Management is pretty clear and easy to implement – how to manage your money and invest wisely, it is slightly more than that. It is the educated process of how you save, invest, budget and spend domestic income. This can also fall on overseeing money usage for a business too. Everyone in some form or another practices money management in day-to-day life, whether in their personal capacities or with investment management such as trading. Trading forex and CFDs successfully does require discipline. You’ll need a proper knowledge of the basic elements that are vital if you are expecting long-term gains from this industry. Inexperience is possibly the main reason for traders losing money in forex and CFDs trading. Neglecting your money management principles as well as emotional trading increases risk and decreases your reward. As forex is extremely volatile at the best of times, therein lies an inherent risk, and having correct money management skills are essential when entering the markets.

Risk Management

When entering in to a forex or CFD trade, there needs to be a certain understanding, that you will enter risky situations and accept this as a prerequisite for leveraged trading. There are many risks when trading, however, there are various ways to reduce these risks.

While your profits are generally connected to the risks, here are a few principles:

Position sizing can be approached in a few ways, as simple to as complex as you choose, as long as it is best suited to your platform. This way you are able to easily manage both the losing trades and the winning ones. There are three models we can follow:

Fixed lot Size

Great way for beginners to start their trading careers. This means that traders will trade with the same position size, probably small. Lots can be changed during the trades according to how the account increases or decreases during the trading period. The account size is important when starting out, keep it small and use a leverage of 2:1, this way you can steadily grow potential profits over time.

Equity Percent

The idea behind Equity Percent is based on the size of your position based on the percentage change in equity. It is best to determine the percentage of equity for every position and this will determine and allow for growth of equity in relation to position size. One can always increase the percentage of equity used for every trade, but it is not without mention, that the higher the profit potential, the higher the risk.

What is a safe percent of equity to trade with?

It is often advised to trade with a smaller percentage of equity such as 1% or 2% that equates to 50:1 leverage per trade also allowing you to stay in your position for a longer period of time. Simply put, keep the size of your trades proportional to your equity, if you enter into losses, the position size is reduced preserving the account from depleting to a zero balance too rapidly. One can also reduce the size of the initial trade when you enter a losing streak to minimize the equity damage. Remember that breaking even after losses takes more time than losing the same amount.

Advanced Equity percent with stop loss

The methodology behind this technique is to limit each trade to a set up a portion of your total account equity, this is often between 2-10%. This method differs from Fixed Ratio in that it is used in trading options and futures and helps you increase your exposure to the market while protecting your accumulated profits. You can also use our trading calculator in order to estimate the possible outcome of a trade before entering it.

Guidelines for setting trades daily or weekly exposure levels

Let’s look at a simple example: if a trader’s trading balance is $1000 and he decides to risk only 2% of the balance ($20) in every trade. In case he trades a mini lot (10,000 units) of EUR/USD, then every pip is worth 1 USD. Thus, the trader should put a stop loss order if the price drops 20 pips. Losing 5 trades in a row will result in losing roughly $100. Now, let’s say the same trader is ready to risk 10% of the budget on a single trade. He trades a standard lot of 100,000 units of EUR/USD, then every pip is worth 10 USD. In this case the trader should put a stop loss order if the price drops 10 pips (=$100) on the first trade. If he lost the first trade, the new stop loss target is 9 pips (=$90) which is 10% of the remaining balance of $900, and so on to 8,7, and 6 pips in following losing trades. Losing 5 times in a row with this kind of exposure will result in total loss of $400.

Setting trades daily or weekly exposure levels
Number of Losing Trades (balance $1,000) 2% exposure 10% exposure
1 $980 $900
2 $960 $810
3 $940 $730
4 $920 $660
5 $900 $600

Same manner of exposure calculation can be scaled to include daily/weekly exposure levels. If, for example, the daily exposure level is 10% of the balance, then in the first example the trader would need to stop trading on the same day when he lost $100.

Risk and Reward ratios using Stop Loss

When you are ready to start trading after practicing on a paper trading account, you will open your live trading account on the appropriate platform and deposit your acceptable capital. Providing protection of your invested capital when forex or stocks move against you is essential and represents the basis of money management. Trading with a serious approach to money management can start with knowing a safe risk and reward ratio as well as implementing stops and trailing stops:

Stop loss:

This is the standard method for limiting loss on a trading account with a declining stock. Placing a stop loss order will set a value that will be based on the maximum loss that a trader is willing to absorb.  When the last value drops below the set amount, the stop loss will be triggered and a market order is put in place so that the trade is haltered. The stop loss closes the position at the current market price and will prevent any accumulating losses.

Trailing stop:

In trailing stop there are more advantages when compared to the stop loss and it is a more flexible method of limiting losses. It allows traders to protect their account balance when the price of the instrument they have traded drops. An advantage of the trailing stop is that the moment a price increases, a ‘trailing’ feature will be set off, permitting any eventual safeguard and risk management to capital in your account. The main benefit of a trailing stop is that it allows protecting not only the trading balance, but the profits of the ongoing trade as well.

Risk and reward ratios

Another way you can increase protection of your invested capital is by knowing when to trade at a time of potentially profiting three times more than you will risk. Give yourself a 3:1 reward-to-risk ratio, based on this you should have a significantly greater chance of ending up in a positive return. The main idea is to set the target profit 3 times larger than the stop loss trigger, for instance setting a take profit order on 30 pips and stop loss on 10 pips is a good illustration of 3:1 reward-to-risk.

Keep your reward-to-risk ratio on a manageable scale here is an easy illustration of the reward-to-risk ratio to better understand it:

Reward-to-risk ratio
10 Trades Loss Win
1 $1,000  
2   $3,000
3 $1,000  
4   $3,000
5 $1,000  
6   $3,000
7 $1,000  
8   $3,000
9 $1,000  
10   $3,000
TOTAL: $5,000 $15,000

Money Management tips with AvaTrade

Whether you are a day trader, swing trader or a scalper, money management is an essential restraint that needs to be learned and implemented per trade opened, no matter your trading style or strategy. Implement the money management techniques or you increase the risk of losing your money. These tips are basic and easy to follow when trading and in risk management:

You should never invest what you can’t afford to lose

First rule of thumb is never fund your account with money that you don’t have. Remember that if you can’t afford to absorb the losses of the invested capital then do not fund your account with money that you can afford to take a loss on. Trading is not a gamble, it needs to be entered into with educated decisions.

Stops and limits are meant to be implemented per position

As your broker we advise you to set stop loss orders. Take them as seriously as you do your investment, trading should be done with precision and not luck. You need a stop loss for every trade, it is your safety net that will protect you from big price moves.

When you profit

When you reach your target profit, close the trade and enjoy the gains from your trading. Withdrawing from AvaTrade is simple, fast and safe. Open your account and enjoy all the benefits and trading advice from market professionals, test our services on your risk-free demo account.

Setting your stop loss and take profit orders

One of the most basic of trading principles are how to set your risk reward rations properly. This can be done by establishing where you can define your trade is going, how far the market will go in your favor. Having this number in mind sets the tone for organizing your Stop Loss (S/L) and Take Profit (T/P) orders. As we mentioned, the traditional ratio in currency trading is 3:1 for the beginner, using a lesser risk reward ratio will become too risky. For the more experienced trader this can be increased to a minimum of 4:1 but never above 5:1.

Steps for setting up your S/L and T/P:

To illustrate the aforementioned rules here’s an example: The current price EUR/USD is trading at is 1.02660. We assume that the market will trend upwards, and we want to ride the trend, since we believe that the market will go to 1.02759 at a minimum. So we would take our target price of 1.02760 and subtract the current market price of 1.02660: 1.02760 – 1.02660 = 100 (pips). To calculate the value in pips of the risk factor based on a 3:1 reward/risk ratio we divide the total number of pips (100) by the reward ratio (3) = 33.33 pip (risk). We have easily worked out the risk and reward targets and now we set the S/l and T/P levels. Finally, to calculate the final stage take the current market price and subtract from it the risk value. Then add the reward value to the current market price and the final figures will be the S/L and T/P. 1.02660– 0.00033 = 1.02627 S/L. 1.02660 + 0.00100 = 1.02760 T/P.

Money Management main FAQs

#source


RELATED

Dogecoin vs. Bitcoin: Which one is the Better Investment?

Dogecoin and Bitcoin are two well-known crypto assets. However, some traders may not know how to compare Dogecoin vs. Bitcoin, so knowing some of the significant similarities and differences...

Guide to Account Security: Safeguarding Against and Addressing Scams

At forex-ratings.com, your security is of paramount importance to us. Our mission is to offer you a digital environment where you can invest, trade, and communicate confidently...

Demo Account: Why It's Needed and How to Open It

A demo account in online trading is a tool that allows beginner traders to gain experience in financial markets without risking their real money. It is a type of account that mimics the trading conditions...

What does it take to be a Forex trader?

With all the buzz around stocks and cryptocurrencies, Forex trading has all but fallen out of favour of late. While there is certainly much to be gained in the equities...

Risk Management on Forex: Basic Rules

Senior traders would say that there is no chance to build a successful career without risk management. Whatever your trade duration is, the trade should...

Why Trade Forex: All around Forex Trading

It is widely known that forex is the most traded market in the world so once someone understands its benefits, it will become easier to understand why they need to trade forex...

A Guide to Trading EURUSD

EUR/USD is the currency pair which matches the exchange rate of euro (EUR) against the US dollar (USD). Traders can trade EUR/USD using financial derivatives like contract-for-differences (CFDs)...

Tight spreads. High liquidity. Instant execution

It's commonly believed that success in currency trading comes from professionalism and luck. However, often it's far from the truth. You should always remember that...

Understanding Signal Providers and Forex Trading Signals

In the vast realm of forex trading, a 'signal' serves as a beacon, pointing traders towards potentially profitable trade opportunities. A signal provider is akin to a lighthouse keeper...

What is stock split and stock split reverse?

Apple, Amazon and Tesla have all split their stocks in the past in order to make their shares more accessible to retail investors. In the following article you will learn what a stock split is...

An Introduction to Contract for Difference (CFD) Trading

Contract for Difference, or CFD is an agreement made between two parties, the buyer and the seller (CFDs broker and client), stating that the buyer should pay...

What is crypto mining?

Cryptocurrency mining has brought about a new gold rush where individuals and businesses are deploying mining hardware to earn as much cryptocurrency as possible as so-called miners...

Reading Forex Charts: Decoding Patterns, Indicators, and Informed Decisions

In the world of forex trading, understanding price movements is paramount. Forex charts serve as the canvas upon which traders analyze historical and current price data to make informed decisions...

Position Trading vs. Swing Trading: Differences and Similarities

Position trading and swing trading are two prominent trading strategies that you can use to access the markets. Both methods provide market opportunities as you trade...

Best Currency Pairs to Trade for Beginners

Forex is a financial market where currencies are bought and sold to make a profit. Trading in the Forex market is done in pairs, each consisting of two currencies...

The Evolution and Significance of Forex Trading

Ever since its establishment in the 1970s, forex trading has seen a rapid transformation. One of the chief driving forces behind its monumental growth has been the explosion of technology, which enabled the creation of online trading platforms...

What is a Good Profit Margin in Trading?

Profit margin measures the earnings relative to the revenue. The three main margin metrics are gross profit margin, operating profit margin, and net profit margin...

The Discipline of Setting your Stop-Loss Order

Are you wondering how you can more easily manage and monitor your trades? This article will show you the benefits of setting stop-losses in your daily trades!

Which is the Best Online Trading Platform for Beginners?

If you are new to forex trading, then you must probably be looking for the best trading platform which is usually selected based on top-notch tools and resources...

Everything You Need to Know About Margin Trading

Margin trading is a popular method used by traders all over the world. It can offer attractive opportunities, but as with any form of trading there are no guarantees and the level of risk must be taken...

FP Markets information and reviews
FP Markets
81%
RoboForex information and reviews
RoboForex
77%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.