Money Management - The Holy Grail Of Trading

Money management determines how much to risk on each individual trade. This is a vital element of any trading system - risk too much and the chances of going bust are too high, risk too little and the reward for trading is too low.

The main methods for calculating trade size are:

Fixed Fractional

The number of contracts to trade is determined by a fixed percentage of current equity. As only whole futures contracts can be trade this, effectively, means that the trader uses 1 contract per $x of equity. For example 1 contract per $10,000.

Fixed fractional, however, requires unequal achievement at different contract levels. For 1 contract every $10,000 to move from 1 contract to 2 requires a profit of $10,000 from 1 contract. To move from 10 contracts to 11 still requires $10,000 profit but from 10 contracts. So for smaller account sizes it will take a long time for the money management to actually kick in and for larger account sizes the number of contracts traded will jump wildly around.

Using fixed fractional the number of contracts traded would be calculated as equity/x, where x=dollars per contract ($10,000 in the above example).

Contracts - Equity Required $

1 - 10,000

2 - 20,000

3 - 30,000

4 - 40,000

5 - 50,000

6 - 60,000

Fixed Ratio

Fixed ratio adds a variable to the fixed fractional method.

Fixed ratio adds delta to the calculation. The delta is a factor which is required to move to the next contract level. The lower the delta the more aggressive the money management is.

The formula is:

equity required to trade previous contract size + (number of contracts x delta) = Next level.

Eg starting with a base of $10,000 for 1 contract and a delta of $5,000:

Contracts - Equity Required $

1 - 10,000

2 - 15,000

3 - 25,000

4 - 40,000

5 - 60,000

6 - 85,000

Comparing the above table to that for fixed fractional it can be seen that at the lower account levels less equity is required whereas as the account grows the number of contracts traded becomes less aggressive.

Tim Wreford runs Online Futures Trading, a website that provides information and resources for traders. Tim also provides a free day trading system, the results of which are updated daily on the site.

---

Momentum Trading: A Practical Day Trading Strategy to Get Profits from Hot Stocks

Momentum day trading can be extremely profitable when done correctly...Day... Read More

Stock Market Report: Day Trading or Swing Trading Online? Stock Investing Information

Profitable day traders recognize that momentum trading is among the... Read More

Stopping Yourself

I read on a bulletin board a traders comment that... Read More

Forex Trading

Foreign exchange market, or better known as FOREX, is the... Read More

Mechanical or Discretionary Trading - Which is Best?

Discretionary TradingPure discretionary trading will rely solely on the traders... Read More

Writing A Trading Plan

All professional traders have a trading plan. Trading futures is... Read More

How Do Other Countries Devalue Their Currencies?

Countries devalue their currencies only when they have no other... Read More

The Yin and the Yang of Markets

I am reading a fantastic book on trading, first published... Read More

Trading Tips No 1: Learn How to Trade The Moment of Truth

So you have learned how to trade the markets by... Read More

Factors Influencing a Currency Pair Exchange Rate

IntroductionThe exchange rate refers to the value of the US... Read More

Online Stock Trading: Freedom of Trade

I remember the first time I started to trade online.... Read More

Disgruntled

The following situation happens quite often to many traders. Look... Read More

The Secret of Reduced Margin Spreads

One of the best kept secrets in trading is that... Read More

Forex Broker

A broker is any person or firm that charges a... Read More

A Short Introduction To FOREX

FOREX is the world's largest and most liquid trading market.... Read More

FOREX 101: Make Money with Currency Trading

For those unfamiliar with the term, FOREX (FOReign EXchange market),... Read More

Option Arbitrage in the Forex Market

What is arbitrage? Arbitrage is the simultaneous buying and selling... Read More

The Major Players in the Foreign Currency Exchange Market - FOREX

Since the US dollar is the centerpiece of the market,... Read More

Two Timeless Rules in FOREX Investing

RULE #1) ~ Cut your losers; let your winners ride.One... Read More

Trading Profitably on the Foreign Exchange Market

You may be asking yourself "how does one begin to... Read More

Chinas New Currency Regime

The base unit for the renminbi is the yuan, which... Read More

Day Trading - Moving Averages vs Support and Resistance

When day trading the SP and Nasdaq futures, do you... Read More

Is The U.S. Dollar About To Reverse Course?

For the first time in several years the U.S. dollar... Read More

A Beginner?s Guide to FOREX

FOREX is the abbreviation for the Foreign Exchange market. FOREX... Read More

Day Trading Success- The Key Is Survival

Most new traders tend to focus just about all their... Read More

Facts of Day Trading

Are you thinking of entering the fast-paced world of day... Read More

The Seven Most Traded Currencies in FOREX.

Currencies are traded in dollar amounts called "lots". One lot... Read More

Forex2u Forex Strategy On Successful Forex Trading

The essence of the FX2u Forex strategy is that it... Read More

What are Your Options Regarding Forex Options Brokers?

Forex option brokers can generally be divided into two separate... Read More

Types of Foreign Currency Hedging Vehicles

The following are some of the most common types of... Read More

Where is the Market Going?

If you ask me whether the market will have moved... Read More

Assessing the Opportunities Presented by the New Iraqi Currency

Could it be possible that you are staring right into... Read More

10 Steps To Professional Day Trading

Everyone trades a little differently. The trading method outlined below... Read More