This is a fight & recovery mode that shall be used accordingly to your comfort level and risk appetite. The best way to make money and survive are always to play small and aim small, but consistently. Frankly speaking, my risk reward ratio is always 1 : 1 in which if I risk 50 dollars, my take profit target is also 50 dollars, but of course with some flexibility in which the ultimate aim is NOT TO LOSE your money.
So at times when I see (not feel) the trade is going nowhere with even 1 pip at profit, I would definitely close it and come back later. Ok fine...
In this money management strategy, as stated above, you always open the first position small relative to your account. My suggestion is always 1 - 2 - 4 increasingly relative to your initial account value.
So, let me give you an example. Considering I have a mini account with USD1000 as my equity, I will always start my first position with 0.10 lot (1 dollar per pip) with 50 pips or USD50 as my risk, which is 5% from my account level. Well, this is the smallest I can open with a mini, unless it is a micro account. I can also make it 3% (as advised by most trading gurus) by risking only 30 pips in each trade. It's up to you anyway...
With this kind of approach, normally I will stick to it and widen my position accordingly as my equity size increase, depending on my risk appetite and market conditions.
The reason behind this strategy is always to double your next position comfortably without taking uncalculated risk whenever you encounter your first loss with the initial position.
So say for example you are down by 50 dollars, with my your first trade, just take the loss and stay out for a while. Careful not to revenge trade immediatley as this is one of your silent enemy that you should handle seriously. Remember this --- REVENGE KILLS... just like the road accident mantra that told you SPEED KILLS... it's almost identical.
So, after settling down and wait for the next setup, you should be able to place your trade with double size (i.e 0.20) and profit target of 25 minimums in order to break even with your initial loss plus some potential profits, subjective to your own market evaluation. Remember, you should always trade with a clear mind with clear objective in hand. As long as you are aware of the potential risk that you are facing, you should be ok.
What if this position is lost as well? Now you are down with 50 dollars + 100 dollars (50 pips x USD2), leaving you with USD850 in your account.
Frankly speaking, if you have 2 loss in a row, you should already stop for the day, or perhaps you need to review back your system. But, as most traders knew that this is rather easy said than done, personally I will give myself another bullet with 0.40 position.
Considering this as your last ammo, you should wait.... wait.... and wait... for a good setup to appear. The best is NOT TO CHASE the market and stay away for a while. Take this as do or die situation. Remember, instead of the 1:1 RR ratio, this time we will use the 1:2 RR ratio so you have no choice but to get this right. (Stop Loss 25 pips and TP @ 50 pips)
Get the idea? With 50 pips x 4 dollars per pip, you could get USD200 back, covering your 150 loss plus 50 dollars profit. But if still you get this one wrong, you will be down by another 100 that bring to a total loss of 250 dollars, or 25% of your account. Divide this by 3, you are actually risking 8.3% in average fo your each trade. Yeah sounds big I suppose but that's what I do with my tiny account.
Come on guys... whether you like it or not, trading is indeed a game. You have no choice but to get it right at least 6 out 10 in order to win this game consistently. No matter how good your money management is, you still have to find a system that works well for you or otherwise you will always be the 90% mass crowd who lose money all the time.
This is my strategy and it serves me well. If you are comfortable with it, use it by all means. But if not, please do not blame me as I am not charging any fee on sharing this particular method that I am using.
There are 3 reasons behind this strategy:
1. Regardless of how big your account is, if you start big and lose, it is very hard to come back using the same or smaller size position. You will tend to kamikaze your account sooner than you realize. This is a BIG NO NO...
2. Start small position relative to your account so that you will be less pressured, relax and compose in making a good trading decision, making profit slowly but consistently with clear objectives.
3. You will trade with razor sharp accuracy (rather than blindly) as you know you can't afford to make 3 bad trades in a row.
Trust me, you got to treat this as a serious business and trade with clear objectives in mind (i.e what is your daily profit target & daily threshold limit or maximum loss). If you do this consistently, chances are better for you to take the money out of the market consistently, instead of you giving your hard-earned cash to the market...
All the best...
NEXT : My Ways to Emphatize the Market... Using Reverse Psychology
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