Money Management Methods

Of The Top Forex Traders

AuthorJohnNolte

NolteFX.comNolteFamilyForexTrading1
Disclaimer

Tradingcarriesahighlevelofriskandmaynotbesuitableforall
investors.Nevertradewithmoneyyoucannotaffordtolose.The
contentsofthisbookareopiniononlyanddoesnotconstitute
investmentadvice.Thepossibilityexiststhatyoucouldlosemore
thanyourinitialdeposit.NolteFXwillnotacceptliabilityforanyloss
ofprofitwhichmayarisedirectlyorindirectlyfromuseoforreliance
onsuchinformation.

CFTCRULE4.41HYPOTHETICALORSIMULATED
PERFORMANCERESULTSHAVECERTAINLIMITATIONS.
UNLIKEANACTUALPERFORMANCERECORD,SIMULATED
RESULTSDONOTREPRESENTACTUALTRADING.ALSO,
SINCETHETRADESHAVENOTBEENEXECUTED,THE
RESULTSMAYHAVEUNDEROROVERCOMPENSATEDFOR
THEIMPACT,IFANY,OFCERTAINMARKETFACTORS,SUCH
ASLACKOFLIQUIDITY.SIMULATEDTRADINGPROGRAMSIN
GENERALAREALSOSUBJECTTOTHEFACTTHATTHEYARE
DESIGNEDWITHTHEBENEFITOFHINDSIGHT.NO
REPRESENTATIONISBEINGMADETHANANYACCOUNTWILL
ORISLIKELYTOACHIEVEPROFITORLOSSESSIMILARTO
THOSESHOWN.

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Contents

Introduction
TraderEmotions
Discipline
MoneyManagement
FinalWords

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Introduction

BeforewegetstartedIwanttoletyouknowtherisksinvolvedwith
trading.ItispossibletoloseMOREmoneythanyouroriginalinvestment.
NolteFXwillnotacceptliabilityforanylossofprofitthatmayarise
directlyorindirectlyfromuseoforrelianceonsuchinformation.The
contentsofthisbookareopiniononlyanddoesNOTconstitute
investmentadvice.Thecontentsofthisbookarehypotheticaland
theoretical.

Thisisnotabeginnersguidetoforex,thereisplentyoffree
informationthatcanbefoundonlinebysimplysearchingonGoogle.Iwill
notbeexplainingpips,leverage,margin,MT4,expertadvisors,rollover,
discretionarytrading...etc.Thesearethingsyoushouldalreadyknowwhen
youreadthisguide,youdonothavetoknowthem,howevertherecould
besomethingsthatyouwon'tunderstandifyoudon't.

Ifyoudon'talreadyunderstandforexthenIsuggestyouyougothrough
aforexschoolbeforeyoubegintradinglive.Here'salistofsomereputable
sites,oryoucansimplyGoogleitandfindtonsoffreeinformationabout
it.BabypipsSchoolofPipsologyisverygood,howevereachsiteisvery
easytounderstandandshouldcovereverythingyouneedtoknowtostart
tradingforex.

https://www.dailyfx.com/forexeducation
http://www.babypips.com/school

NolteFX.comNolteFamilyForexTrading4
 http://www.investopedia.com/walkthrough/forex/

TheKeyToSuccess

Forextradingisexciting,funandaddicting,thereasonmosttraders
tobeingsuccessfulisNOTexciting,its
losemoneyisbecausetheKEY
NOTfunanditsNOTaddicting.

Therearethreemajorpointstobeingsuccessful,traderpsychology,
disciplineandmoneymanagement.Thesenormallycomeasapackage
andtheymustcomeasapackageinordertobesuccessful.Ifyouhavethe
correctmindsetthenyouwillbedisciplinedandyouwillusecorrect
moneymanagement.

IwanttogiveananalogythatIwilluseasareferencefortherestofthe
book.Letsimaginetradingastakingaroadtripfrom$10,000to
$1,000,000.Inordertomakethetripwewillneedareliablecar,witha
powerfulenginetogettherequick,andthenwewillneedthekeystostart
thecar.

Thekeysareourmindsetanddiscipline,thiskeepsusmoving,
determinedtoreachourgoal,neverquittinguntilwearethere.Thecar
andengineisourtradingstrategyandmoneymanagementthesecomeasa
package,atradingstrategyissimplyapartofmoneymanagement.

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 1TraderEmotions

Whenwehearofallofthegreatbenefitsoftradingandthestoriesof
tradersturning$10,000intomillions,ouremotionsgetallfiredup,we
startcountinghowmuchmoneywe'llhavein136monthsfromnow,
we'reupallnightlookingatthechartsfiguringuphowmuchmoneywe
couldhavemadeonthat100pip1hourcandleetc.Wecan'twaittoopen
ourfirsttradeandmakesomemoney.

Thetraderdescribedaboveisamemberofthe95%oftradersthatlose
money.Why?Becausethistraderisbeingdrivenbyhisemotions.After
learningaboutallthemoneytheycanmaketradingforex,mosttraders
overlooktheverysimplestepsthatmustbetakentobesuccessful.They
overlookthefactthatlosingmoneyisjustasmuchapartoftradingas
makingmoney.

Itispossibletohave3,6andeven12months(possiblymore)of
drawdown.Itsduringthisdrawdownperiodthat95%oftradersallow
theiremotionstocontrolthemandabandontheirmoneymanagement
strategyorabandontradingaltogether.

Thelistofemotionsthatyouwillexperienceistolongforthisbook,I
highlyrecommenddoingsomemorereadingaboutemotionsatThomas
Bulkowski'swebsite,twoarticlesinparticular:

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 http://thepatternsite.com/Psychology.html
http://thepatternsite.com/MoneyHoney.html

Lessontolearn:Losingmoneyisapartoftrading,acceptit,don't
makeANYdecisionsbasedonyouremotions.Controllingemotionsisthe
numberonechallengethattradersfaceandthenumberonereasontraders
fail.

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 2Discipline

,
Thesolutionissimple,youmusthavedisciplinedetermination
and
consistency,thesearethekeysthatkeepsyourcarrunning,headedtoward
thegoal.Forgetaboutthedrawdowninyouraccount,justfocuson
followingyourtradingplan.Letstakeanotherlookatthedrawdown.

Thelefthalfisthe50%drawdownwetalkedaboutearlierandtheright
halfiswhathappened~3monthslater.Thedrawdownperiodweedsoutall
theemotionallydriventraders,whilethededicatedtraderscontinueoninto
profits.Maintainingdeterminationandconsistencythroughthelossesis
theonlywaythatyouwilleverreachyourgoal.

and
Lessontolearn:Neverquit neverdeviatefromyourplan,realize
thattradingisalongterminvestmentNOTagetrichquickscheme.As
longasyouarefollowingyourplanandexecutingtradesaccordingtoyour
strategyrules,don'tquit.

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 3MoneyManagement

Thisisthepartthatyoumustbeconsistentat,thisisthehardwork
thatsneitherfunnorexciting.Mosttradersknowaboutmoney
managementbutneverpracticeit,itsinterestingtonotethatthesecretto
successfultradingisactuallyknownbyalmostalltraders,itsjustignored
oroverlooked.Yourmoneymanagementincludes:

1. Whentogetintoatrade.
2. Whentogetoutofatrade.
3. Howmuchtoriskpertrade.

Strategy

Yourtradingstrategyaretherulesyoufollowtoenterandexittrades.
Therearemanydifferentkindsofstrategies.Theyrangefromstrategies
thattakealotofsmallwinswithafewlargelosseseverynowandthen.
Tostrategiesthattakemanysmalllosseswithlargewinseverynowand
then.Eachkindofstrategyhasadifferentsetofemotionsthatitbrings
withit.

RiskManagement

Riskmanagementhasaveryprofoundeffectontheoutcomeofa

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strategy,ortradingingeneral.Yourriskmanagementishowyou
determinehowmuchmoneytoriskpertrade.Thetwomostcommon
methodsofriskmanagementare:

1. Fixeddollaramount.
2. Fixedpercentageofequity.

FixedDollarAmount

Thebenefitsofusingthefixeddollaramountisyougetaslowand
steadyincreaseinprofits.Theequitycurveismuchsmoother,thismeans
lessdrawdownandfasterrecoveryfromlosses.

Thedisadvantagesofthisisyouhaveaslowerincreaseinprofitsand
whenyousufferanumberoflosingtrades,yourriskpertradeisincreasing
percentagewiseversusyourequity.Thisequatestoalimitednumberof
lossesbeforeyouwipeoutyouraccount.

FixedPercentageofEquity

Thismethodisindirectcontrasttotheformer,benefitsinclude
compoundingreturnsasyouraccountgrowsanddiscountedrisksasyour
accountshrinks.Thisgivesafasterreturnonyourinvestment,while
reducingyourriskifyoubegintosufferlosses.Thisallowsyoutosustain
amuchlongerrunofconsecutivelosses,becauseyoudiscountyourrisk

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onnewtradesasyouraccountbalancedecreases.

Disadvantagesincludeslargerdrawdownsandslowerrecoveryfrom
losses.

Comparison

Letscompareeachmethod,takealookatthechartsbelow,thefirst
chartshowsfiveconsecutivelossesandthesecondchartshowsfive
consecutivewins.

5ConsecutiveLosses
FixedDollarRisk$100 FixedPercentage10%
Trade Risk$ Balance Risk$ Balance
#0 $1000 $1000
#1 $100 $900 $100 $900
#2 $100 $800 $90 $810
#3 $100 $700 $81 $729
#4 $100 $600 $73 $656
#5 $100 $500 $66 $590
TotalLost $500 $410

5ConsecutiveWins
FixedDollarProfit$100 FixedPercentageProfit10%
Trade Win$ Balance Win$ Balance
#0 $1000 $1000

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#1 $100 $1100 $100 $1100
#2 $100 $1200 $110 $1210
#3 $100 $1300 $121 $1331
#4 $100 $1400 $133 $1464
#5 $100 $1500 $146 $1610
TotalProfit $500 $610

Usingthefixedpercentagemethodgivesussmallerlossesandgreater
returns.

FixedDollarMethod FixedPercentageMethod
Return$ Return% Return$ Return%
InitialBalance $1000 100% $1000 100%
5Losses $500 50% $410 41%
5Wins $500 +50% $610 +61%

Possibleuseofthefixedpercentagemethodisforatraderwithasmall
investmenttomakelargereturnsveryquicklywithmuchlessriskof
losingallhisinvestment.

Thefixeddollarmethodcouldworkwellforatraderwithalarge
investment,whoislookingforlowdrawdownandsteadyreturnsforthe
longerterm.

Lessontolearn:Your
doesALLthework!Let
moneymanagement
itdothework,don'tletyouremotionsdestroyyourcommitmenttoyour

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tradingplan.

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Resources

Tools

http://forex.timezoneconverter.com/
http://www.babypips.com/tools/forexcalculators/positionsize.php

ForexTraining

https://www.dailyfx.com/forexeducation
http://www.babypips.com/school
http://www.actionforex.com/articleslibrary/beginnerstutorials/
http://www.investopedia.com/walkthrough/forex/

MetaTrader4

http://www.investopedia.com/university/metatraderguideintro/
http://www.babypips.com/school/undergraduate/junioryear/howtouse
metatrader4/introductiontometatrader4.html

RecommendedReading

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https://futures.io/psychologymoneymanagement/35267accountblown
up.html
http://www.investopedia.com/articles/forex/06/fxmoneymgmt.asp
http://www.investopedia.com/articles/trading/02/110502.asp
http://thepatternsite.com/Psychology.html
http://thepatternsite.com/MoneyHoney.html
http://www.investopedia.com/articles/forex/08/3marketsystem.asp
https://en.wikipedia.org/wiki/Algorithmic_trading

Websites

https://futures.io
https://www.dailyfx.com/
http://www.forexpeacearmy.com/
http://www.babypips.com/
https://www.myfxbook.com/
https://www.mql5.com/
https://fxvm.net/
http://thepatternsite.com/index.html
http://www.forextsd.com/
http://www.forexfactory.com/
http://www.investopedia.com/

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