Money Management Main Guidelines

The portfolio management can get very complicated as it requires the use of advanced statistical measures. We will try to approach the whole matter in a relatively simple level. In general, the following bullet points below can be considered as helpful tips regarding the allocation of funds and determining the size of your trades.

• The total invested funds must be limited up to 50% of your total capital. The other half should act as a reserve for drawdown periods. For example, if you have invested $100,000, then only $50,000 would be available for trading purposes.
• Your total commitment in any trade must be limited to 10-15% of your total equity. As a result, for your $100,000 account, only $10,000 to $15,000 would be available for a margin deposit in any trade. This should prevent you from placing too much capital in any one trade.
• The total amount risked in any trade must be limited to 5% of total equity. The 5% refers to how much you are willing to lose if your trade doesn’t work. For an account of $100,000 you should only risk up to $5,000 on a single trade.
• Total margin in any market group should be limited to 20-25% of your total equity. This is to protect you against getting heavily involved in market groups as these groups tend to move together. For example Gold and Silver are precious metals that usually trend in the same direction. So using these two precious metals for more of $20,000 to $25,000 of your total equity will affect your diversification. You should be able to control your commitments from trades that fall under the same group.

Despite that the guiding rules above are considered standard, some traders tend to be more aggressive than others and therefore, they take bigger positions in Forex trading. On the other hand, you can find traders that are considered more conservative than others. The most important matter is that you should form some type of diversification that will allow you to protect your capital during losing periods.