He has a monthly readership of , traders and has taught over 20, students. A lot of people out there have disagreed with me on this topic in the past so I wanted to write about it today to clarify my views on it.
First off, Forex is highly leveraged, much more so than a stock trading account. Forex should be thought of as a margin account, because that is essentially what it is.
Since we are only in at most, a few positions at a time that we can use high leverage on, and we are only holding for typically a few days to one or two week maximum, we do not need to diversify our risk across many different markets, in other words, diversification in Forex is irrelevant.
Nobody who understands these facts would put ALL their trading money in their trading account because it is simply not necessary. What you put in your trading account does not necessarily reflect all the income you have to trade and it does not reflect your overall net worth. In stock trading, you need a lot more money to control more money because there is less available leverage. Typically, if you want to control k worth of stock you need to have k in your account. You see, money management is dependent on both trading skill and personal risk tolerance, it should not be just some arbitrary percentage of your trading account.
This is just totally ridiculous! He may put 20k in his account just to cover the margins of the position sizes he normally trades. If he is trading like a sniper as a swing trader in the Forex market what I teach and how I trade , then no, it makes absolutely no sense at all. It just does not make any sense and it does not apply to Forex like it might to longer-term stock investors.
This sounds great in theory, but in reality it is really just a bunch of B. What about drawing money to live on? You cannot compound your trading profits in your trading account forever, it is not realistic or practical, forget about compounding. That just shows you the unpredictability of your equity curve.
Longer-term compounding is just for dreamers…. Your risk per trade is a very important dollar figure that YOU need to come up with based on your personal circumstances which will encompass a variety of different variables.
Instead, we think in terms of dollars risked per trade and what our personal risk tolerance is ; basically how much we are willing to risk on any one trade. We might have 1 million of trading money but will only have 50k in a Forex account. The answer I give to them is always basically the same:. As you improve and build your confidence you may feel more comfortable increasing your risk per trade a little bit.
As you can see, how much you should risk per trade is a somewhat personal question that requires some thought, time and trading experience to properly answer.
Trading is the easy part of trading does that make sense? This is just a really stupid way to try and manage your money, and it clearly leads to gambling and over-trading. Your risk per trade changes with skill, experience and confidence. Remember, money management is no good without a high-probability trading method, and if you guys have been reading my blog for a while, you know I am a huge advocate of price action trading.
Implementing a solid price action trading method with a sound MM plan is in my opinion, the quickest path to trading success. While it may or may not be well-intended and have some statistical premise, it just seems wrong to apply a static numerical rule to such an organic, multi-variant action with so little regard for context. We arrived at some of the same ideas, such as dollar value vs margin and environment.
And caution is always implied. But I too think its a bit misleading to teach people that they can have actuarial insurance by accepting a dogmatic number as something that will save them from strategic threats to their money and trading. Its too fluid of an activity to suggest static rules. Hi Nial, Absolutely amazing article.
Great article nial and very well put i used to use percentages but then changed to dollar amounts and just decided on an amount im prepared to lose and decided on an amount i will pay myself. A relevant post to the newbies. Everyone should know not to keep trading money in your account, look what happened to Alpari! Its also common sense to know the money you can risk, should be your trading capital which should be kept in a safe high interest bank account which offers fast withdrawals. I hated my job.
So I agree with you there. Or at this point try to increase my capital. Lee, nice comments, whatever makes sense for you is what you should do. My post is designed to get you thinking and not just buy into the ideas normally discussed around the net about money management, at least I have got you thinking: Nial, thank you for this article. An amount based on personal preferences at first may not be so relevant and rational as we all know beginners are very greedy when they first start.
Again thank you for challenging conventionnal beliefs. Gotta risk it , to get the biscuit ;. I have a number of your article all of them very informative as well as thought provoking and this article more or less confirms my risk appetite.
Thanking you for and excellent article. I fully agree with you. Please allow me to share alittle of my own 2cents worth and my trading journey. Although I did not take the time to work out the numbers mathematically I suck at maths!!! You WILL go broke!!! My contention here is if I get stopped out it only means that my timing was off…. Cos without the first 3 prerequisites, no amount of MM will help. Of course, the trick is learned from you only. Your advice to decide how much one is willing to risk and to use the money made to live off, is on the money.
Keep up the good work. Very well articulated and the examples you provided are fantastic. Hi Nials, to be honest , the only lesson to be learnt ,is from your coaching and advice, they rest , as you say is B. Nial, Thank you again for your weekly articles that help keep me on track and encouraged! Are you planning to come to the Chicago area any time soon? That would be more than awesome. Thanks a lot for your article. Waiting for your new articles on MM, especially piramiding. Thanks Nial This is a solid Ideas.
I totally Agree with You. Our risk per trade changes with our skill, experience and confidence to our trading strategies. I think they are attracting to loss because they keep on applying risk hehehe… law of attraction. God bless you Sir. Direct to the point. We are looking for the way to become successful with the least wasted time. Learn to trade the market, improving ourselves and let experience and skills setting the risk we can handle.
Nial you are super Man.. Your approach makes sense. What I miss in your article is your personal hit rate of your trades.. If you have your history journal up to date and you know the percentage of your trades that are successful you can more or less calculate what is an acceptable risk. Then you should also look at the maximum trades you lost in a row and realize that it is statistical possible this happens 2 times in a row.
I agree that the risk should be taken from the free available money for trading. From that you can calculate how much you need in your trading account to accomplish this. Having money in what ever account is also a risk, so for me it is logical not to put al your free trading money there.
But beware of those unscrupulous brokers as you are revealing there secrets. My money management rules were as follows: Cheers, and happy trading, Jack. It will be similar to you absolute amount MM.
Furthermore, a trader could have k capital and he put 10k in the trading account to trade. The main point I believe is the following. Or two of 1 lot?
Most of your margin is not being used, therefore not being monetized. Hey Niel, Very solid advice! Not only is it good for MM,anyone can apply this to many areas of there lives.
I somewhat disagree with you Niall. The percentage rule helps to understand and comprehend how much to risk on a trade. I could not help stopping myself to comment on your say. Mr Fuller, Indeed, this another profitable lesson to traders especially newbes, thanks I learnt a lot from it. However i realise now that i am not completely setting and forgetting my trades.
I have a bloomberg App on my phone which keeps me up to date with price changes while at my day job.More...