Improving your forex money management

This content is provided for educational purposes only. If you decide to apply what you have learned, you do so at your own risk. Please read our disclaimer.

This lesson builds on the forex trading beginner strategy. If you are new to forex trading, check out our free beginner strategy if you haven't already.

Solid money management is a key element in becoming a successful forex trader. The financial markets can be volatile and if you add leverage to the mix — as most traders do — the risks involved are substantial.

A strategy that gives you an edge in the markets only gets you part way there, because ultimately you do not know what will happen. Some trades will be winners and some will be losers — the only solution is to consistently take a series of trades based on the strategy.

You should never risk more than 2% of your trading account for any single trade.

However, even when you are using a strategy, and you believe that a certain trade has a 70% chance of going your way, there is still a 30% chance that your trading career is over if you risk 100% of your trading account when making that trade.

So what is that maximum that you should risk? As a general and widely accepted guideline, you should never risk more than 1-2% of your trading account for any single trade.

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Position size and stop loss are used to manage risk

Once you know how far away the stop loss is from your entry price, you can calculate how large your position can be so that you will only lose at most 2% of the amount in your trading account if your stop loss is hit.

In order to manage the total amount that you can lose in a trade if it goes against you, you will use a combination of stop loss and position size.

In general, the stop loss is suggested by the strategy that you use. Once you know how far the stop loss is away from your entry price, you can calculate how large your position can be so that you will only lose at most 2% of the amount in your trading account if your stop loss is hit.

Simple money management rule in the forex beginner strategy

In step 3 of the beginner strategy, when we instructed you to enter the volume into your pending order, we gave you a very simple rule for doing so.

The money management rule stated that for every $100 that you have in your trading account, you should trade 0.01 lots rounded down (based on trading a major currency pair, with the US dollar as the quote currency).

We were able to state this because we have tested the results over a significant sample size and found that the average stop loss over these trades came to 12 pips. To account for variations in the stop loss size, we added a margin of error and rounded this up to 20 pips.

For currency pairs quoted in USD, a loss of 20 pips equals a loss of $2 per 0.01 lots traded, i.e. if you had $100 in your trading account, it would equal a 2% loss. Thus, if you trade at most 0.01 lots per $100 under the beginner strategy, you will usually not risk more than 2% of your account in a single trade.

Improving forex money management in the beginner strategy

The simple rule given in the beginner strategy is extremely cautious when compared against the principle that you should at most risk 2% of your account in making a trade. In the vast majority of cases, the simple rule gives position sizes that risk significantly less than 2%, and rarely, it could happen that the risk is higher than 2%.

In order to exactly calculate what position size can be traded so that under your stop loss, the risk is exactly 2%, a bit more effort is required.

To calculate the position size that equals the amount you can risk, you use the following formula:

Position size in lots = (Account size * the % risk per trade)/ (stop loss in pips * value per pip)

Be careful that when using the formula, you make sure that the currency of the numerator and denominator are the same – if not, convert one into the other at the current market price.

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Reference table for EUR/USD

Using the above formula, it is possible for you to create an easy table for each currency pair or instrument that you seek to trade.

Using the table

As many people trade the EUR/USD currency pair, we have created such a table below. The table assumes that you do not want to risk more than 2% of your account in a single trade.
To use the table, find the row that represents the amount that you have to trade with. Then when you enter your pending order, find the column that represents the size of the stop loss you have for that position.

When you have the account size and stop loss size, the cell will tell you exactly what number to enter into the “Volume” field when you are entering and adjusting your pending order.

Note that the account size is given in US dollars. If you have your account denominated in another currency, you can determine the corresponding US dollar amount based on the current market rate before using the table.

Account balance5 pips10 pips15 pips20 pips25 pips30 pips35 pips40 pips
$2500.100.050.030.030.020.020.010.01
$3750.150.080.050.040.030.030.020.02
$5000.200.100.070.050.040.030.030.03
$6250.250.130.080.060.050.040.040.03
$7500.300.150.100.080.060.050.040.04
$8750.350.180.120.090.070.060.050.04
$1,0000.400.200.130.100.080.070.060.05
$1,5000.600.300.200.150.120.100.090.08
$2,0000.800.400.270.200.160.130.110.10
$5,0002.001.000.670.500.400.330.290.25
$10,0004.002.001.331.000.800.670.570.50
$100,00040.0020.0013.3310.008.006.675.745.00


If you want to further evolve as a trader, you can go to our module on how to become a better forex trader:

Module
What helps you besides having a clear trading strategy? Learn about maintaining a good mindset and using interactive learning methods to become a better trader.

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  • Can you trade more than 1.0? Is it when you use the leverage? Is there a maximum have much you can have on your account depending on if you trade with lots or micro lots?
  • Hi,

    Yes you can trade however much you want to - it depends on:

    1. How much you have in you account.
    2. How much margin your broker requires you to have for a standard lot (which is what you trade if you put in 0.1 lots into the volume field).

    To Illustrate:

    Lets say that you wish to trade a standard lot. You open an account with a broker and your broker specifies that you need to have $1000 margin to open up a standard lot. Of course what is happening here is that your broker is effectively lending you $99,000 to add to your $1000 so that you can control a standard lot - i.e. $100,000 of currency.

    The $1000 is for margin, or a security of the money that you have borrowed. Now if the position goes against you, the money per pip (in the case of trading a major pair - $10 per pip) will be deducted from your account. However, in theory, the trade can keep going down and down and you can lose your entire account - in this case $1000 - if the trade goes against you by 100 pips.

    If the trade goes against you by 101 pips, then you now actually owe the broker $10, because the initial money that you had in your account has been used up and the trade has still gone down. most of the time, your broker will close your trade down before this happens so that you do not end up owing the broker anything. (But be careful, sometimes this is not the case in rare circumstances). So you see the initial $1000 that the broker required you to have, is used as collateral for the trade.

    if you has $2000, then you can open up a trade of 2 standard lots - $1000 margin for each. If you have $3000 then you can open up 3 standard lots and so on.

    Point to note however - only ever risk two percent max of your account on any single trade. This means that you are highly unlikely to trade a standard lot with just $1000.

    But hope that answers your questions and gives you a little extra information around it.

    Anything please just shout smile
  • Can't belive i just found this page now. I never thought about it this way. basically I'll always lose the 2% but my rewards are higher if the trades go in my favour. Genius!
  • I am trying to work this out for another currency pair but am a little confused as to what "value per pip" is? Any help would be greatly appreciated.

    Thanks,

    Bradders
  • Hey bradders20,

    pip value basically means how much is one pip movement worth in USD (or other currency you use), and it depends on your lot size (whether you trade micro lots, nanolots or lots).

    In exact terms pip value is calculated as (one pip, with proper decimal placement/currency exchange rate) x (Notional Amount)

    For example approx. pip value for 1 lot (10,000 units of base currency) on EURUSD is: 1 pip = $1.00; .8941 to .8942 is worth $1.00 per 10,000 Euros.

    I am not sure if it is understandable, so let me know, if you have more questions smile
  • Thank you very much, yes I understand. If I have any more questions I will let you know. Thanks.
  • Hey bradders,

    I´d like to greet you in our community smile If you want to, you can introduce yourself here: Introduce yourself.

    How is the trading going? Did you manage to do some trades or are you still just learning? happy
  • Unless I'm horribly confused, a lot is actually 100,000 units. A mini-lot is 10,000.

    Say the EUR/USD is at 1.28460, you make a buy position of 1 lot and the market goes up to 1.28500. The market just rose 4 pips (40 pipettes). This means you bought 100,000 euros and the value rose 4 pips. To find what percentage the market increased by, divide the pips (.0004) by the value of the currency pair (1.28500), so .0004/1.28500=.00031128404, meaning the value rose by about 0.03%. 0.031128404% of 100,000 (the lot size) is 31.128404. That's the number of Euros you gained -- you turned 100,000 euros into about 100,031 Euros. Now multiply by the value of the currency pair to convert it back from Euros to USD: 31.128404*1.28500=39.99999914 USD, rounded to 40. Meaning for every pip the pair goes up, you gain $10.

    Basically, what you need to understand is that you order a position, and then the market changes the value of the money by a percentage. When you close the position, the percentage change is what you get as a result. If a pair were at 100.00 and rose to 101.00, the change would be 1/100 = 1%, so a 1 lot position (100,000 units) would have gained 1,000 units. Convert that 1,000 units to USD, and you can see how much money you've gained.
  • Hi!

    I understand this risk management, but how apply this into beginner strategy? When I open a pending order it is not problem, but after I opened one, then how I adjust the position size if the stop loss change? Close that pending order and open a new one, with the modified position size?
  • If I have X capital. So the max I can risk is 0,02X. If my stop loss is Y pip from the enter price. And if the 1pip=$1,00 (in 1 lot). So Y shuld be: Y*1,00<=0,02X or I'll have to chance the lot size?
    And how much 1pip is in a mirco lot (0,01 lote EURUSD)?
  • Hello, I'm trying to use this method, but I'm being limited up to 0.05 lots. When I call MODE_MAXLOT of MarketInfo() function, the answer is 0.05. Can you help me?
  • morkosz:
    Hi!

    I understand this risk management, but how apply this into beginner strategy? When I open a pending order it is not problem, but after I opened one, then how I adjust the position size if the stop loss change? Close that pending order and open a new one, with the modified position size?

    Hi morkosz!
    I apologize for the delayed answer. You should never risk more than 2% of your trading capital in a single trade. The beginner strategy suggests that you shouldn't increase your risk once the trade has been executed (once in a trade) - so you only move your stop loss if it would decrease your risk.

    If you accidentally risked more than 2% you can close part of the position by clicking "Close order" or the "X" in the Metatrader 4. In the popup you should insert the volume you want to close.

    If you have a pending order in place and need to adjust the volume, you'll need to close the pending order and open a new one.

    Rodorush:
    Hello, I'm trying to use this method, but I'm being limited up to 0.05 lots. When I call MODE_MAXLOT of MarketInfo() function, the answer is 0.05. Can you help me?

    Hi Rodorush!
    Welcome to Tradimo and thanks for posting. Are you using the FREE100? If yes your account is limited to position size maximum of 0,05. This is in place in order to ensure that new users don't accidentally use too big position sizes.

    If you need to trade more than 0,05 you can always open multiple positions. Please bear the 2% rule in mind though. smile

    Thanks!
    - Petteri
  • rafamm84:
    If I have X capital. So the max I can risk is 0,02X. If my stop loss is Y pip from the enter price. And if the 1pip=$1,00 (in 1 lot). So Y shuld be: Y*1,00<=0,02X or I'll have to chance the lot size?
    And how much 1pip is in a mirco lot (0,01 lote EURUSD)?

    Hi rafamm84
    1 pip in 1 microlot of EUR/USD is $0.10 and the calculation for lot size using the 2% max risk per trade is :
    Position Size in Lots = (Account Size X the % risk per trade) / (Stop Loss in Pips X Loss per Pip per Lot)
    This thread explains the lot size more comprehensively Trading capital - Lot size
  • somehow the money managment plans are usually sabotaged by the trader himself due to complicated psychological reasons this is way its matter of forcing a habit of MM with hard training can create a trader

    This is why i want to thank you for the size limitations you created with varengold
    but there has to be another psychological training for that matter
    MM lessons are not enough alone
  • Hi infinity80
    Not wishing to state the obvious but have you looked at this thread?
    Trading psychology ?
  • i did...and they are stating the obvious which is far needed for creating a trader....training does not lessons.....human minds dont always act based on what they know

    in a simple words knowing the right thing to do is very different from being able to actually do it
  • Totally agree.. that's what differentiates an average and a great trader biggrin
  • Can someone explain me what exactly are "stop loss in pips" and "value per pip" and how do I know exact numbers?
  • Hi DiMiro,
    Stop loss in pips is the distance between your entry and your stop loss expressed in pips. If you enter at 1.2000 and put a stop loss to 1.1900 then your stop loss is pips is 100 (pips).

    When it comes to currencies, your profit/loss is always determined by the counter currency('s value). That is: USD in EURUSD, GBPUSD, AUDUSD but CAD in USDCAD or JPY in USDJPY.

    When trading 1 lot you buy or sell 100,000 of the base currency which is the first: EUR in EURUSD, GBP in GBPUSD etc. That buying or selling is paid for by the counter currency and any profit and loss is expressed in this one. For 1 lot (100,000) the pip value is always 10. Why? Because 1 pip is 1/100th of a cent (= 1/10,000) of 1 currency unit so if we take 100,000 currency unit we get the pip value 10! For 1 lot of EURUSD 1 pip's value is $10 for 1 lot EURGBP 1 pip's value is £10. To get how much this is in your account currency (let's say EUR) just check the relevant exchange rate:
    EURUSD = 1.12 then 1 pip per 1 lot on all XXXUSD pairs is 10/1.12= €8.92
    EURGBP = 0.74 then 1 pip per 1 lot on all XXXGBP pairs is 10/0.74=€13.51

    Japanese pairs are different (1 pip is only 1/100 of the currency unit)but let's not complicate things further wink

    You might need to read it couple of times before you grasp it but i hope that makes sense.

    If not feel free to ask!
    Regards.
    Peter
  • hindsighthero:

    EURUSD = 1.12 then 1 pip per 1 lot on all XXXUSD pairs is 10/1.12= €8.92
    EURGBP = 0.74 then 1 pip per 1 lot on all XXXGBP pairs is 10/0.74=€13.51


    Peter

    So, as I understood, "8.92" and "13.15" are exactly that pip values that I need, right?

    And one more question, please. What means "trading 1 lot", because I've also seen nanolot, microlot and others. I know there is difference between them, but what that "lot" means?

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