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Money management

Money management is an important but often overlooked element of every trading strategy. In this article we will describe all basic approaches to money management.

Constant position size

This simply means using the same number of lots for every trade.

Percentage of balance or equity

This technique calculates the number of lots according to the current balance or equity of your account. The difference between balance and equity is that balance is a result of all closed (realised) positions while equity takes into account all yet unrealised profit or loss. Using this method you will trade less aggressively, when you have less money and more aggressively, when you have more.

Risking a percentage of balance/equity

This method can only be used in conjunction with stop losses. Firstly, you define the stop loss distance for your positions. Then, the size of every position is calculated in such way that you can only lose a specified percentage of your balance or equity on each trade.

Risking a constant amount

This is very similar to the previous method and must be used with stop losses. The position size is calculated in such way that only a specified amount of money can be lost on each trade. For instance, you may want to risk no more than 50 USD on each trade.

Martingale

The first position is opened with the starting volume. If it succeeds, the position size stays the same for the next trade. If it fails, the size is multiplied by a specified factor (like 2). In this way the possible win in the next trade is bigger than the sum of all losses so far. For instance, if we start with 0.1 lots, we will use 0.2 lots, 0.4 lots, 0.8 lots and so on in case of consecutive losses, until we finally win. When we win, the we will trade with 0.1 lots again. Although this may seem like an always winning technique, it is in fact very risky and often leads to bankruptcy. We strongly discourage you from using this method.