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LESSON: Fixed Money Method

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[op_liveeditor_element data-style=””][text_block style=”style_1.png” align=”left” font_size=”16″ font_font=”Montserrat” font_color=”%237e7e7e”]Most traders who practice money management use the fixed percentage method.

This method entails always risking the same % of your account no matter how large your account is. An example of this is trader Jim may have a $10,000 account and risk 3% of his account. If Jim’s account starts going down he will continue risking 3% of his account but the trade risk in money will continue going down.

Using this method the trader will be able to use the power of compounding to increase their account size because as they are winning their account risk in money will continue rising whilst keeping the risked percentage the same.

If however; the trader starts loosing they start to put themselves at a disadvantage because as they lose the money risked will fall. For example; trader Lucy has her $10,000 and is risking 5% of her account per trade. On the first trade she loses and goes down 5% or $500. On the next trade Lucy will have an account size of $9,500. Now if Lucy wins the next trade and makes 1:1 risk reward most people would think that this would replenish her account to where it was at the start but is doesn’t! Because Lucy now only has a $9,500 account the amount of money risked using the same 5% is no longer $500 but only $475. So If

Lucy makes a winning trade she is effectively behind the eight ball using the fixed percentage method. If Lucy continues to lose she will have to make more and more just to break even!

Fixed Money – Pick an Amount $ Your Are Comfortable With

The method I use is the fixed money method. An example of this is trader James has a $10,000 account. James is comfortable risking $500 per trade (this amount has to be a logical amount and give your account enough losses that you can survive and your edge play out!).

James loses the first trade and his account goes down by $500. Now James continues to use the same amount of money no matter if his account goes up or down. James on the next trade makes a 1/1 Risk Reward trade. Unlike Lucy who needs to make bigger risk reward trades just to stay in the game, James is back at even.

The way trader James manages his money is similar to how I manage my money.

I have a set amount I am comfortable risking. I then have set goals for when my trade amount risked goes up. For example I may have a $5,000 account and be risking $100 per trade. My goal could then be to increase my trade risk in money to $150 when my trading account reaches $7,500 etc.

As you can see there are pros and cons top both methods. Using the fixed % method you will be able to compound you wins to make a bigger profit if you continue to win. When you lose using this method it takes more and more to get back to break even.

Using the fixed money method the positive is you don’t have to win bigger and bigger risk reward trades just to break even. The downside is when you win with this method you are not compounding your wins and will continue to have the same size trades until your next goal is reached.

Both methods are correct and it comes down to whatever the individual trader is happy and most comfortable using![/text_block][/op_liveeditor_element]