money management formula

Money management formula

Account balance times percent of acceptable loss gives you the amount of money you are willing to lose in a trade divided by the numbers of pips in your stop equals the number of lots you can trade.


This is really is a simple calculation, but a few simple rules too follow.

1) Your account balance; account balance multiplied by no more than .05 equals (5)% of your account balance, which is the most I want to have at risk at any one time (example: $5,000 mini account times .05 equals $250)
2) Number of pips I am willing to risk; determined by the price I am getting into the trade and where my stop is placed. Add the spread times 2 to limit head fakes in my position.
3) Lots you can trade; The number of pips per trade is determined by the difference between the dollar amount at risk and the number of pips in my stop loss.

Foot notes:

If you have an account balance of $5,000 and your willing to risk 1% of your account balance on this trade (5000x0.01=50) this gives the dollar amount of your account balance you are putting at risk on this particular trade in this case ($50) if stop loss is 25 pips away from your entry price (including 2x the spread) you divide the dollar amount by the number of pips in your stop (50/25=2) this now gives you the number of lots you can trade.
(5000x0.01=50/25=2)