Hi Traders! Money management plays a crucial role in Forex trading, while compared to the other markets Forex is more flexible but still many traders are losing money here, the reason is just not because of their lack of experience but mainly it’s because they don’t use proper money management methods. The intention of this article is to make you understand the several ways in which you can manage your account.
Why Is It Important To Manage Your Account?
Money management is crucial for the success of every trader. It doesn’t matter if you have 10 years of experience or you are just a beginner. Money management and risk management are the foundations on which you will start building yourself as a professional trader.
Think of it like the wheels of a car or the foundation of a house. You can’t run the car without wheels, neither you can’t build a house if you don’t lay the foundation first of all. The most important thing is that each trader should know which money management method is better for him and he or she feels more comfortable with.
There are three types of money management methods that I use which are as follows:
Classical Money Management Trading Method
There are clear advantages and disadvantages in this type of money management method. This method is the best example to show how an account can grow each and every month slowly but steadily (of course sometimes with losses) which will bring us to the goal that we have set for ourselves. The main advantage of this method is that it is steady, easy and we never risk all our money, we actually risk only some percent per trade like 1% or 2% we don’t risk more than that.
Let’s say for example I have a $1000 account and I made it grow to $1100 then again I made it grow to $1200 but after working for 2 or 3 months I understand that it’s growing very slowly and I wanted to make it grow faster, so I take more risk and I begin to lose. This is how life and trading works, I want you to understand this clearly, that the lower the account is it’s difficult to make bigger profits and the bigger the account is it’s easier to make bigger profits.
The below chart is based on the “Capital Of Beginning” with a standard account of $5000 (This is just an average number for the purpose of example, everyone should go with their own possibilities of capital that you can afford to start with. Also, you should understand the fact that “The lower the account is the smaller the growth is and the bigger the risk is”).
So in the above example, I have taken $5000 as the capital of the beginning. Personally, after profit and loss trade my gain each month is between 5% to 10% do I reach this every month, the answer is no, do I reach it most of the month, the answer is yes. So you can see in the screenshot of the excel sheet that the account has grown by 5% in the first month to $5250, this will be the balance at the beginning of the second month. In the second month, I reached my goal which is 10% and the balance reached $5775. Then I continued to the third month and I finished this month with a loss but here comes the psychology, in this situation that is after a loss we should understand the fact that we are being tested here by ourselves and trading because this is when the real psychology begins to work.
Generally, after one or two months of losses most of the traders start to lose their patience and try to revenge the market, they try to trade bigger accounts or intraday or only longer-term trades. But keep in mind that when you try to revenge the market then the market might do the same to you and you will lose all your money. I can guarantee you this because I have been in similar situations, this is why you must be ready to accept losses. I know it’s difficult as its “easier said than done” but that’s the reality and we need to accept it.
So the third month I accepted this loss and my balance went down, then the next month my gain was 5% and my balance became $5699.925. Then as you can see in the chart below I had 2 good months then again a loss month. Again I had 3 good months with average gains after that the 12th month which is the end of the first year my account balance is $9901.05 which is almost equal to $10,000 this is not a lot of money after trading for a year but you can’t expect a lot of money starting with $5000 account and this is almost 100% profits, we can’t ask for more.
I then continued to trade for another year with some losing months and some months with small profits. After two years as you can see in the table below, I made $19849.37 which is almost equal to $20,000 from $5000 account balance. Now here comes the psychological part, you might think that “do I have to wait for 2 years to turn $5000 into $20,000”, you could have come across many advertisements where they promised to make $500 account into 1 million in a short span of time if you still believe it then please wake up my friend because this is the reality.
If you decide to become a trader then you should understand the process. For example, it’s like buying a house, you can’t earn all the money to buy the house within a year, you have to save the money until you have some respectful amount and then you can buy the house, it might take many years to earn that money. It’s the same process here as well.
The table I showed above is the result when you risk the same exact percentage per trade, in order to help you understand better I will create a separate table and will show you the gain/loss in pips and also the gain/loss in percentage.
Let’s say I start with a new $5000 account, I risk 2% and the only thing that will change here is the lot size. For example, if I risk 2% it means that I risk $100 per trade if my stop loss is $200 pips and the money I risk is $100 pips which means I should go for a trade where each pip will be half a dollar ($0.5) which is 0.05 lot size. Now I opened a trade and I lost 200 pips which are in percentage -2% then again with the next trade I lost another 200 pips which is -2% percentage now and on the whole its -400 pips but only -4% from my account balance.
Then I have a trade with a stop loss of 50 pips which means each pip should be $2 that is $100 is my risk per money and $50 is my risk per pair so I gain 50 pips and I gained 2% now. Then I have a trade with 20 pips stop loss, 20 pips profit which means I have to make $5 per trade, 0.5 lot size that is $5 per pip, I earned 20 pips and we now have another 2%. I then had two trades with the same values. Now, on the whole, I was – 400 pips in the beginning now I have made +110 pips which means the total now is -290 pips but I am +4% on the account balance.
This looks impossible right but it is definitely possible when you work with this kind of money management. Here is the simple math as you can see in the screenshot below, I have shown you how it is done. You can still earn money when you lose pips, I want you to understand that. This is the way to manage a medium account.
The Martingale Money Management Method
There are a lot of advantages and disadvantages to trading the Martingale money management method. Let’s see an example of how this method works, the capital of the beginning which I am going to use in this example is $5000 and my first trade is without leverage.
The Stop Loss and Take Profit value is 40 pips each, let’s say I lost $20 in the first trade then I duplicated the lot size for the next trade and I lost $40 again. I then duplicated the lot size again for the third trade (I duplicate only when I lose when I profit I start from the very beginning) and it continued the same way till the fifth trade as you can see in the screenshot below.
Finally, on the sixth trade, I got $40 profits with $16 per pip (the lot size for this trade is 1.6). My account has now grown to $5020 at that stage. Now I start again from the very beginning, meaning that I profited $20 on the seventh trade, then on the eighth trade I lost $20 and on the ninth trade, I profited $40. The total account balance is $5060.
The reason I started without leverage is just to make it more comfortable because for example if I would have started with 0.2 lot size and lost $80 in the first trade then on the next trade I duplicated the lot size and if I lost $160 then after 4 or 5 trades I won’t have enough money to hold my next positions. This is why when you start with small leverage or without leverage, you can lose seven trades in a row and then win the eighth trade and you can still be profitable. This is how the Martingale money management method works.
Here is an example of Martingale Money Management method
Money Management Method Without Leverage
This is the method that I use to manage my big account, there is a huge advantage with this method and also a small disadvantage. Here your first trade will always be without leverage(1:1) and I spot a bearish divergence on the weekly chart (If you want to learn in-depth about divergences, you can benefit greatly from the videos on my channel while also embarking upon Divergence University for comprehensive divergence education) and based on the rules I start to sell here, this trade goes against me for -200 pips, I didn’t set stop loss here then I added another position with same lot size 0.05 now my account balance is $9900 (because its 200 pips minus the previous lot size which is half a dollar per pip) and the second one goes against me as well which leads to -200 more now the account balance is $9700, now I opened few more positions which went against until the divergence worked.
Here is an example of this scenario from a real chart
It is good to trade this way because I am -800 pips or even more which is -5% from my account balance. The market always moves in cycles, you can’t find any pair in the weekly chart without cycles, sometimes the cycles are very long it could take one or two years but in the end, the cycles will happen and you will profit with that.
Here is an example of cycles from the weekly chart
Here is one more example of cycles from the weekly chart from another currency pair
Note: If you want to learn about cycles you can find it here
So once this cycle happens I choose to close the trade and as you can see in the chart below I am in a +5% balance on this trade at the end (of course after a long period). I know that $500 per year is not a lot of money but by doing it this way you can hold many positions on more pairs.
I admit that with the first money management method you earn more money but this money management method is more comfortable and easy to trade when you have a big account, by doing it this way you can be calm.
You can check any currency pairs, you will never find a situation where the cycles never happened, there is one reason for that because in Forex it is one currency against another currency always (despite stocks and commodities) the governments never let currencies gather strength or lose too much, it has never happened and never will.
I prefer this money management method for big accounts and you should understand that the profits are limited here, they are much less than the previous two methods but here the profits are steady and when your account is big the profits can be big as well. I personally prefer this method because I don’t have to babysit my trades, I can check them once a week to see what happened and I will never be worried because with small positions I knew that I will never blow my account.
- While using the third money management method you should take trades only where you don’t pay huge swaps because if you pay swaps for a year that amount will be enormous.
- The third money management method applies only when you trade bigger timeframes.
Keep in mind that money management plays a vital role in Forex trading when you have a good money management plan it can definitely increase your chances of becoming a successful trader. The most important thing with money management is that you should practice and choose the method that you feel very comfortable with.
So, traders, this is what I wanted to share with you all regarding the money management methods that I use in my trading.
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Thank you for your time in reading this article.
To your success,
Certified Financial Technician