Mar 17 2010
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Forex Scalping Cheatsheets FREE. Over the years, traders have developed many different ways to manage their money. Most of these money management systems are based on different statistical probability theories. The idea behind a good money management system is that you should never place all your money at risk on a single trade but rather put an amount that is appropriate with the level of volatility in the market. Otherwise, you risk losing everything on a single trade. Not a good idea, huh!
Calculating position size under the different money management systems is a tricky stuff. You just need to understand the concept. Trading software packages often include money management calculators with them. Let's discuss some of the different money management style. There are more but these are some of the most commonly used by traders.
Another thing that you need to keep in mind is that stock trading may require a different money management style as compared to futures trading or forex trading. So you need to understand the concept behind these different money management styles as a trader.
The most basic is the Fixed Fractional Money Management System. This system assumes that you want to limit your risk to a set proportion of your trading account mostly between 2% to 10%. Within that range, you would trade a larger percentage of your money for a less riskier trade and a smaller percentage of your money for a less risky trade. This money management style or what you call system is widely used by traders. Most trade by risking not more than 2% of the trading account. The Fixed Ratio Money Management System is commonly used for trading options and futures. It has a formula that you can master if you are an options trader or a futures trader.
Another money management system is the Martingale System. It has its root in gambling and casinos. But many traders love to apply it in trading as well. Under the Martingale System, you start with a set amount of money, let's say $3,000. If your trade succeeds, you trade another $3,000. But if your trade loses, you double your amount to $6,000. You keep on doubling the amount, until you have a winner. You might have heard about Doubling Down in a Casino. Well, this is what it is. Under the Martingale System, you will always come out ahead as long as you have an infinite amount of money. The problem is you can run out with your money before you have a winning trade.
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