ARMFRisk and money management on forex
Money management on forex and risk management are two terms for different tasks, and confusing them leads to strange decisions: for example, to raising the size after a losing streak. We take apart what belongs to managing the risk of an individual trade, what belongs to managing the whole capital and where these areas overlap.
Money management in trading and risk management: the difference in one sentence
Risk management answers the question «how much do I lose if this trade fails». Money management answers «how much money takes part in the trading at all and how that amount changes over time». The first is calculated before every entry, the second is reviewed once a month or quarter.
| Question | Risk management | Money management |
|---|---|---|
| The unit of decision | One trade | The whole account |
| How often it is applied | Before every entry | Periodically, on a schedule |
| The main parameter | The risk percentage and the stop | The size of the trading capital |
| A typical rule | No more than 1 % per trade | No more than 25 % of the deposit in margin at once |
| What it protects | From one mistake and from a streak | From the whole capital ending up in the market |
| How the result is measured | The depth of a drawdown | The ratio of trading to reserve capital |
What belongs to money management in practice
Four decisions that are taken in advance rather than at the moment of a trade — and that is exactly why they are easier to follow.
A deposit is not all the free money. It is sensible to keep on the account an amount whose loss will not force a change of plans, and not to deposit the rest at all.
a decision outside the marketEven with careful risk per trade, several open positions can take up almost the whole deposit as margin and leave the account without a buffer to the stop-out.
usually no more than 20–25 %A fixed percentage of current equity is the simplest answer: the size grows with the account and shrinks in a drawdown automatically.
a fixed fractionWithdrawing part of the profit is a piece of capital management rather than a sign of disbelief in the system. Withdrawn money does not take part in the next drawdown.
regular withdrawalA money management table: how it is built and what for
A «money management table» usually means a template where the deposit sizes run down the side and the stop length across the top, with the size in lots at the intersection. The point is not to be calculating at the moment of a trade, when there is no time for it.
Below is a fragment of such a table for 1 % risk and a pip value of $10 per full lot. The fractional part is dropped to hundredths: an extra hundredth raises the loss above the percentage you set.
| Deposit | A 20-pip stop | A 30-pip stop | A 50-pip stop | A 100-pip stop |
|---|---|---|---|---|
| $500 | 0.02 | 0.01 | 0.01 | 0.00 |
| $1,000 | 0.05 | 0.03 | 0.02 | 0.01 |
| $2,500 | 0.12 | 0.08 | 0.05 | 0.02 |
| $5,000 | 0.25 | 0.16 | 0.10 | 0.05 |
| $10,000 | 0.50 | 0.33 | 0.20 | 0.10 |
| $25,000 | 1.25 | 0.83 | 0.50 | 0.25 |
The zero in the top right corner is not a typo: with a deposit of $500, risk of 1 % and a stop of 100 pips the trade is allotted $5, while the minimum size of 0.01 lot loses $10. Such a trade is impossible without breaking your own rule, and the right conclusion is not «I will take 0.01 and risk two percent» but «this instrument with this stop is not available to me yet».
A pip value of $10 per standard lot holds for pairs with the dollar in second position — on the euro, the Aussie and the Kiwi. For USD/JPY, USD/CHF, USD/CAD and crosses it is different and depends on the current rate; the calculation procedure is covered separately.
A fixed fraction against a fixed lot
Two ways of setting the size, and the difference between them shows only over distance.
What must not be in money management. Raising the size after a losing streak is not capital management but martingale. Formally it is also a «size management system», but its property is the exact opposite: it turns a rare large loss into an almost inevitable one.
Three levels of capital worth distinguishing
The practical part of money management comes down to not mixing up three different amounts. Confusing them is the reason why «a 20 % drawdown» means an inconvenience for one trader and the end of trading for another.
| Level | What it is | Which rule applies to it |
|---|---|---|
| Free capital | Money whose loss does not change your plans and obligations | Sets the upper bound of the deposit rather than the account size you would like |
| The trading deposit | The amount on the account at the broker — part of the free capital | The risk per trade and the drawdown limit are counted from it |
| Working margin | The part of the deposit locked for open positions | Limited to 20–25 % so that a buffer to the stop-out remains |
A non-obvious rule follows from this table: topping up an account in a drawdown means moving money from the first level to the second at the worst moment — when the statistics of the system are in question. A planned top-up on a schedule does not create this problem, because the decision was taken in advance.
Frequently asked questions
Which comes first: risk management or money management?
Chronologically money management: first you decide how much money is put on the account at all and what part of the capital stays outside the market. But in daily work risk management is applied more often: it comes into play before every trade, while the capital rules are reviewed rarely.
What percentage of the deposit can be in margin at once?
The common reference is up to 20–25 %, and it is not about the risk of loss but about the buffer of free funds. The more margin is used, the closer the account is to the level at which the broker starts closing positions by force — even if the total risk on the stops is small.
Should profit be withdrawn?
That is a question of goals rather than of technique. The practical argument for withdrawal: money taken off the account does not take part in the next drawdown, so a regular withdrawal locks in part of the result regardless of what happens next. The argument against: withdrawal slows the growth of the size under a fixed risk fraction.
How should the size be changed as the deposit grows?
It should not be — under a fixed fraction it changes by itself. The formula counts the risk from current equity, so a 20 % growth of the account automatically raises the size by the same 20 %. Increasing the size by hand «because it is going well» has nothing to do with capital management.
What is money management on forex in simple words?
These are the rules about money outside an individual trade: how much in total is placed on the trading account, what part of the deposit is locked as margin for open positions, when profit is withdrawn and how the size changes when the account changes.
How many lots can be held open at once?
The limit is set not by a number of lots but by two caps: the total risk on the stops (usually 2–4 % of equity) and the share of used margin (20–25 %). With a deposit of $5,000, leverage 1:100 and a size of 0.12 lot per position the first cap is exhausted at three or four trades, long before the second.
Is a money management table needed if there is a calculator?
A table is useful where there is no time to calculate: it contains the size for typical combinations of deposit and stop length in advance. A calculator is more precise, because it takes into account the pip value of a specific pair and the required margin for your leverage.
How do you account for funds on several accounts at one broker?
Every trading account is counted separately: margin and the stop-out apply to it rather than to the sum of all of them. But the risk in percent is best counted from the total trading capital — otherwise splitting a deposit across three accounts quietly triples the overall bet.
What to do with the profit on a forex account?
The decision is taken in advance and written down: for example, withdrawing a fixed share once a month or after a certain gain is reached. Money taken off the account does not take part in the next drawdown — that is the only way to lock in part of the result for good.
Should a broker bonus be counted as capital?
No. Bonus funds usually cannot be withdrawn, and part of them is cancelled when your own money is taken out. In a risk calculation they inflate the base: a percentage of equity that includes the bonus gives a size larger than the real capital allows.
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