Money Management Examples - The Rewards of Patience
MONEY MANAGEMENT EXAMPLES
MINI ACCOUNT
Balance: $5,000
Risk Per Trade: 2% or $100
Trading Opportunity: EUR/USD Long. We want to go long, but this does NOT mean we just buy wherever the market happens to be. We map out the trade, look for an entry price close to the support level and wait for the market to come to us. This makes all the difference in the world when it comes to risk and reward as shown below.
Current Price: 1.4230 Support: 1.4200 Resistance: 1.4260 & 1.4300
Target Entry: 1.4210 Stop Loss: 1.4185 Target(s): 1.4255 & 1.4295
Total Dollars Willing to Risk: $100
Entry – Stop Loss: 1.4210 – 1.4185 = 25 pips
Trade Size: $100/25 pips = 4 lots
Reward Potential:
Target 1 – Entry: 1.4255 – 1.4210 = 45 x 2 lots = $90
Target 2 – Entry: 1.4295 – 1.4210 = 85 x 2 lots = $170
Total Risk: $100 Total Reward: $260
IF WE DIDN’T WAIT….
We go long at 1.4230 and have a 45 pip stop loss. We can only trade 2 lots because we are only willing to risk $100 or less. We risk $90 and our potential reward is only $90. Why? Because our first target is now 25 pips with 1 lot = $25 and our second target is 65 pips with 1 lot = $65. The total reward potential is $90. Not even worth our time.
STANDARD ACCOUNT
Balance: $50,000
Willing to Risk 2% per Trade:
Trading Opportunity: Short GBP/USD
Current Price: 1.8460 Support(s): 1.8400 & 1.8340 Resistance: 1.8490
Target Entry: 1.8480 Stop Loss: 1.8510 Targets: 1.8405 & 1.8345
Total Dollars Willing Risk: $1,000
Stop Loss – Entry: 1.8510 – 1.8480 = 30 pips ($300 potential loss on each lot)
Trade Size $1000/300 =3 lots @ $900 Total Risk
Reward Potential:
Entry – Target 1: 1.8480 – 1.8405 = 75 @ 1 lot = $750
Entry – Target 2: 1.8480 – 1.8345 = 135 @ 2 lots = $2,700
Total Risk: $900 Total Reward Potential: $3,450
IF WE DIDN’T WAIT…
We have a 50 pip stop loss @ $500 risk per lot = 2 lots. Our targets are 55 pips =$550 & 115 pips = $1,150 = $1,700.
MINI ACCOUNT
Balance: $5,000
Risk Per Trade: 2% or $100
Trading Opportunity: EUR/USD Long. We want to go long, but this does NOT mean we just buy wherever the market happens to be. We map out the trade, look for an entry price close to the support level and wait for the market to come to us. This makes all the difference in the world when it comes to risk and reward as shown below.
Current Price: 1.4230 Support: 1.4200 Resistance: 1.4260 & 1.4300
Target Entry: 1.4210 Stop Loss: 1.4185 Target(s): 1.4255 & 1.4295
Total Dollars Willing to Risk: $100
Entry – Stop Loss: 1.4210 – 1.4185 = 25 pips
Trade Size: $100/25 pips = 4 lots
Reward Potential:
Target 1 – Entry: 1.4255 – 1.4210 = 45 x 2 lots = $90
Target 2 – Entry: 1.4295 – 1.4210 = 85 x 2 lots = $170
Total Risk: $100 Total Reward: $260
IF WE DIDN’T WAIT….
We go long at 1.4230 and have a 45 pip stop loss. We can only trade 2 lots because we are only willing to risk $100 or less. We risk $90 and our potential reward is only $90. Why? Because our first target is now 25 pips with 1 lot = $25 and our second target is 65 pips with 1 lot = $65. The total reward potential is $90. Not even worth our time.
STANDARD ACCOUNT
Balance: $50,000
Willing to Risk 2% per Trade:
Trading Opportunity: Short GBP/USD
Current Price: 1.8460 Support(s): 1.8400 & 1.8340 Resistance: 1.8490
Target Entry: 1.8480 Stop Loss: 1.8510 Targets: 1.8405 & 1.8345
Total Dollars Willing Risk: $1,000
Stop Loss – Entry: 1.8510 – 1.8480 = 30 pips ($300 potential loss on each lot)
Trade Size $1000/300 =3 lots @ $900 Total Risk
Reward Potential:
Entry – Target 1: 1.8480 – 1.8405 = 75 @ 1 lot = $750
Entry – Target 2: 1.8480 – 1.8345 = 135 @ 2 lots = $2,700
Total Risk: $900 Total Reward Potential: $3,450
IF WE DIDN’T WAIT…
We have a 50 pip stop loss @ $500 risk per lot = 2 lots. Our targets are 55 pips =$550 & 115 pips = $1,150 = $1,700.
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