Forex Money Management
Learn to control risks in trade. Forex smart money management
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5. A practical example of applying money management rules:
We have opened a trading account of $1000 USD with a broker and got 20:1 leverage. So, now we have leveraged ourselves to $20 000 USD to begin trading with.
More money means a higher trading power. Correct. But, the higher the trading power, the higher the risks; and when we talk about risks we talk about a real account value which will decrease with every loss sustained during trading.
Now, let's start trading and do the math.
Ok, time to trade. Our trading power measures $20 000 USD (thanks to our leverage).
What will happen if we try to trade them all at once: for one $20 000 dollar trading lot order our Forex broker gives us a pip value of $2 dollars. This means that with each pip gained we will have +$2 USD in our pocket. But this also means that with each pip lost our real account will shrink by $2 dollars.
Now, let's try to trade a $10 000 dollar position. The pip value for this position size will be $1 USD.
If we decrease our trading lot to $5000 USD, our sustainability will raise to -40 pips against our trade. (The pip value for $5000 dollar lot will be $0.50 cents).
As you can see, with the money management rule in place our real account is under control. And even if leverage allows trading larger positions, the risks should be always under control.
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