Forex Signals and Money Management

If you want any success in trading, you will have to control your risk exposure. Money management simply means how much you are putting in each trade you are taking in terms of risk exposure and dollar amount. The standardization process of your trades comes from money management. Standardization does not mean that you will have every trade similar because every trade is different due to its nature or entry, exit and pattern used as a criterion. What standardization does is that it effectively keeps your risk level within the same parameters for every trade you take. If you want any progress in your trading, you will have to control your risk exposure.
How do you feel when you take a position of 10K lot with 100 pips of stop in EURUSD? The loss is 100 in dollar amount. What will your feelings be and how would you handle a position of 100K lot when your stop loss is 50 pips. In this case the dollar loss amount is 500. Of course there is more exposure to risk in the markets and a greater emotional response. In the second case, the stop in pips is half but just by increasing the position size, the dollar amount of loss increased five times. Now let’s see how can these two trades be standardize. This can be done only by position sizing. Use the money management calculator provided to you to do these calculations. Here is how you do it. Suppose the portfolio size is 5,000 dollars.
Your risk in each trade you take is 2%. In the account size box put the dollar amount of your total equity in the account which in this case is 5,000. In the risk per trade box put the 2 in the %age of my total account size. Entry let’s say is 1.1500 and stop is 1.1600 and the stop is 100 pips. This gives you a maximum loss of 100 dollars in the trade. This gives you a calculation of one mini lot size of your position for this trade. To use the second example, we will now use the stop of 50 pips. Entry will be same 1.1500 and stop will be 1.1550. If you are taking a position of 100K lot, by using the money management calculator, you can see you are risking 10% of your account size in this trade. This is very high.
To take a position of single 100K lot you have to bring the risk level down to 2%. This can be done in two ways. One, your stop should be 10 pips instead of 50 pips or if you can not change your stop size, then you have to wait till your account size increases to 25,000 if you want to keep the stop to 50 pips. At this point you have understood the importance of position size and lot size calculation. By keeping the risk exposure to 2%, you are standardizing every trade you are taking and regardless of how big the position is or the stop loss level, if you use these powerful techniques used by top traders, you will have a geometric growth in your account with controlled risk exposure and emotional response.
Adnan Kaleemi is a Registered Commodity Trading Advisor and has been advising Forex traders all over the world in more than 60 countries for the last five years. He is currently registered with the commodity and futures trading commission in the US. He reaches global forex traders through http://www.forexforecasting.com where he provides daily forex signals and forecasts in the major currency pairs EURUSD,GBPUSD,USDJPY and USDCHF along with money management strategies. At http://www.forexforecasting.com you will find informative articles, newsletters and other tools which will help transform your Forex Trading.