Forex Fanatic

Mastering the risk on each trade order not to lose money is the foundation of success for traders. Most of the time traders beginners do not take into account the “loss” in their trading system, only the potential gain is evaluated.

The money management or capital management or risk management is to manage trades following several factors:

• On each position the trader must know what part of its capital is ready to risk and depending on this parameter must adjust the size of the position and / or stop the level of protection.
• Once in position the objective of the trader is to maximize and protect the gains and limit losses. To maximize gains through a strengthening of positions as the market gives us reason is what is called the “pyramiding.” The protection of gains and losses are limited to changing stops protection as the course evolves in the direction anticipated.
• The exit positions is also important, it can be done on purpose or if the trend is showing signs of tiredness.

This concept should be known to every trader because it helps preserve capital and significantly increases the likelihood of seeing his portfolio to appreciate.

The 50% Rule

Here is a trading and money management strategy among many others: the 50% rule

You are entering the market and your position is now winning. You’ll then face a dilemma:
Do I collect my profits or should I let them run and expand?

Huge dilemma if ever there was one! And why not 50%!

Let’s say you’re winning by 50 pips on a position of EUR/USD 50 000 units. In cashing only 50% of your earnings or 25 000 units and therefore (2.5 × 50 =) 125 $ you have already made a decent profit. Better than that, therefore, if the price turns against you, it must be returned by 100 pips before you are losing on this trade! And if prices continue to evolve in your sense your gains would become more consistent!

Managing the Stops

The management of stops is quite simple. My main objective is to preserve my capital therefore each position should not risk more than a certain percentage of my capital. As the size of my position is fixed, once I set a threshold for invalidation on an analysis I infer from my point of entry.
An example to illustrate, suppose I have a portfolio of $15,000, I treat lots of $50k and that I accept losing 1% of my capital on each position.
1% of $15,000 is $150 and I work with positions at $5 a pip on EUR/USD (see value of pips), I should therefore put my stops up to 30 pips from my point of entry.

In practice when I do an analysis (I do mainly for monitoring trend) I have a point invalidation of the trend that gives me with the rule above a level of entry.

Of course the position of the stop is not fixed, for example, I will not always put my stop at exactly 30 pips, I include in my analysis the concept of volatility that allows me to tighten stop depending on market characteristics which reduces the risk.

Performance/Risk

Depending on the distance from the stop I assess whether the trade can be interesting compared to the risk / return. This part is also based on the technical analysis of the course, it allows me to assess the potential of trade. Generally if the potential is less than 4 times the stop I do not take position.
For example, if I have a stop to 30 pips my potential gain must be greater than 90 pips.

This technique theoretically allows a person to redeem the mistakes of analysis. Indeed, if one can deceive 3 to 4 times without losing capital (3 losses of 30 pips = 1 gain of 90 pips).

This relationship (risk / return) is also called the hope of gain.

Trade Exiting

The exit can be done on the stop or on the goal (on a trend followed by working without objective).
Each entry can be treated independently in two phases:

• As long as the risk / return threshold is not wanted my stops are tight at most, they are changing rapidly
• Once the risk / return exceeded we can take more margin to follow the trends as long as possible.

Following the Position

The monitoring of the position allows you to maximize and protect gains.

The protection of the gains achieved through the development of protective stop so the progress depends mostly on technical criteria (moving averages, test… dow).

To maximize gains consists of taking new positions as the market gives us reason. If the initial position is so bearish as the trend is downwards we will open new positions. That is what we call the pyramidal

In the following example we took a short position (downward) on the euro dollar to 1.2875. We move the stop protection on the exponential moving average 50. In a consolidating our position to resume 1.2835. The stop always follows the same moving average to be touched 1.2815.

The results of this trade is 60 pips for the first position and 20 pips for the second. That’s +80 pips. The pyramidal allowed a 30% gain higher with a calculated risk.

Size of the Position

The size of the departing position is fixed, I work with an upgrade that represents a percentage of my portfolio (effect). This allows me to have a potential intervention for multiple track trend (principle of pyramiding).

For example: If you have a capital of $15,000 and that the broker proposes a lever 40 at most. It has a potential $600,000 = $15,000 x 40.
My broker permits trading batches of $50k or $100k therefore there is the possibility of trading 12 × $50k or 6 × $100k.
This choice is very personal and depend on its aversion to risk.