Hello David,


If I will follow the 2% rule then I will only expose 6 pips per trade to risk.

With that I think I have to go to a lower timeframe which is 15-minute trading because I observed that the lower the timeframe the lower the pip range is though I also have to consult with ATR.

What do you think?


Regards,
Jeff

Hi Jeff,

One thing to consider here is the spread on the trade. Depending on the currency pair you are already going to be down from 3 to over 10 pips right from the start due to the spread which does not give you much breathing room.

One way around having to set stops that do not allow a traders position enough room to breath is to reduce position size.

Best Regards,
Dave

Hello David,

As far as I can remember with 1 mini lot a 40 pip gain in EUR/USD trade (0.0040) is equivalent to $40.

So for my first real trade with an initial capital of $300 I am planning to set 40-pip limit and 20-pip stop (with 10-pip trailing stop) and trade 1 mini lot until my capital turned to $1000.

After my capital turned to $1000 I am planning to trade using Van K. Tharp's % Risk Method using only 2% of the current capital to be exposed to risk. I will still continue to trade 1 mini lot until my capital turned to $10000.

What do you think of this?


Thanks.


Regards,
Jeff

Hi Jeff,

You are correct that when trading 1 mini lot a 40 pip move in the market is equal to $40 in any currency pair where the US Dollar is the second currency in the pair. It is also somewhere close to $40 for most other currency pairs as well.

I outline how to calculate profits and losses in the forex market here, however since you are trading on a mini (10K Contract size) instead of a standard (100K contract size) simply divide the pip value by 10.

So a few comments here:

If you start with $300 and trade 1 mini contract of 10,000 of the base currency and risk 20 pips per trade then you are risking approximately 7% of your account per trade.

While you may be comfortable with this a problem arises if you hit a losing streak as then each time you lose money and your account balance drops below $300 then if you continue to risk 20 pips per trade your risk per trade as a percentage of your account is going to increase accordingly so this is something to be aware of.

Secondly if you do not increase your trade size as your account grows larger then I think most traders would agree that it is going to take you a pretty long time to reach the $10,000 mark.

So with this in mind it seems that we are throwing darts around the board but have not hit on a prudent money management strategy yet.

Let me know what you think about the following:

Why not start with a micro account which allows you to trade 1k lot sizes. By reducing your position size when your account is small you can still have your $20 loss limit and keep this within a prudent 2% loss limit per trade.

For example, 2% * 300 is $6 per trade that you can risk and stay within a 2% loss limit. So if you wanted a 20 pip stop loss then this would amount to a contract size of 3K that you could trade. Then when your account got to 600 you could trade a contract size of 6k, then when your account hopefully gets to 1200 you can trade 12k, etc etc.

I will be upfront with you that if you follow a proper money management strategy then it is going to take you a long time to trade a $300 account to $10,000. However as you can see from the above as you get more money you can start upping your position size accordingly and then trading your capital up to $10,000 will be a more reasonable goal.

If you choose not to follow what I think most would consider proper money management then in my opinion while you may get lucky and trade your account up to the $10k level from $300 it will be more out of luck than skill.

So with this in mind what I would suggest is start small, use proper money management the whole time, and as you gain more confidence in your strategy add money from other places like a part time job or something along those lines which will allow you to gather enough starting capital to the point where you can grow your account significantly without having to break the rules of proper money management.

Hope that helps.

Best Regards,
Dave

Hello David,

Now I get it!!!

Actually I am developing my own money management plan based from your suggestion and Dr. Van K. Tharp's "% Risk Sizing".

I call this plan "Milestone Equity Money Management Plan".

Here is a part of my plan:

1.) I will start with $300 capital and only expose 2% of it to risk, which is $6.00 per trade to risk.

2.) I observed that in most of my trades there is a higher probability of hitting a profit of 20 pips rather than 40 pips. Therefore I will use 10-pip stop and 20-pip limit for each of my trade.

3.) Since I will be using OANDA as my FOREX Broker and it does not have any trailing stop feature, I will not use trailing stops on my trades.

4.) Using $6 per trade with 10-pip as a stop, I will use a lot size of $6,000 per each trade. With this I have to lose 50 times in a row before being out of the market. I think this is a decent setup.

5.) I will be trading EUR/USD in an hourly chart. I will not use multi-timeframe analysis.

6.) I will only be doing one trade per weekday.

7.) Once my equity reached the second milestone which is $2000, I will then start trading using $40,000 lot per trade until I reached $20,000. I found out that I am still risking 2% of my total equity (now at $2,000) while doing this.

8.) Once my equity reached the third milestone which is $20000, I will then start trading using $400,000 lot per trade until I hit $200,000. I found out that I am still risking 2% of my total equity (now at $20,000) while doing this.

9.) And so on and so forth...

For all of my trades I will be using 10-pip loss and 20-pip limit.


What do you think?


Regards,
Jeff

Hi Jeff,

Glad to see that you are making some progress. My comments below:

I think most traders would agree that this is prudent.

I am a little concerned that the evidence that this is being based off of is a little anecdotal since it seems you are basing it off of your experience paper trading over the last few days. With this being said, as long as you are willing to do further research on this and adjust as you learn more everyone has to start somewhere.

ok however an option that you do have since you are trading with tight stops and limits is to sit in front of the screen and move your stop manually.

I think most traders would agree that htis is prudent.

What is the reasoning that you will not use multi-timeframe analysis?

ok what is the reasoning here?

If I am understanding correctly here what you are saying is that you are going to start out with $300 trading a lot size of 6K which you are going to continue trading with until you reach an account equity of $2,000 at which point you are going to up your trade size to 40,000.

If I am understanding the above correctly then my question would be why would you not change your trade size each trade depending on the equity in your account. In other words as your equity increases increase your trade size by the same amount and vice versa if you equity decreases.

Same question as above.