Module 12: Manage Your Money & Enter Correct Size Trades

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LESSON: Trade Position Sizing & Money Management

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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”]When working out the potential risk of a trade we should always use the amount of money at stake as our guide.

The number #1 mistake traders make when either thinking in profits, trade management or their potential risk, in other words; how much the trade they are about to enter could lose is working it out in pip terms and dealing in pips.

This is HUGELY dangerous to a trading account balance!

Here is a quick example why…

For this example: 1 standard lot x 1 pip = $10

Trader A makes 10 pips for the week trading 5 standard lots. Trader B makes 40 pips for the week trading 1 standard lot. Now thinking in pips it appears that Trader B has been by far the more successful as he/she has made a lot more pips, however on doing a little mathematics we discover the opposite.

• Trader A – 5 lots x 10pips= $500
• Trader B – 1 lot x 40pips= $400

As you can see even though Trader A only made ¼ the amount of pips that Trader B did, they still made more money, and that’s what counts.

Pips are False Accounting

Here is where the pips false accounting also comes into play. When you use money as your profit and loss it becomes very simple. You have a $100 account and it goes to $110 you are now in $10 profit.

Using the example above; Trader B may now go and open a 10 x lot trade and lose 10 pips (remembering in our example 1 lot = $10). This would only be a 10 pip loss and Trader B has already bagged 40 pips! So losing 10 wouldn’t hurt too much right?

This 10 pip loss would be a $1,000 loss. It would take away the $400 from the 40 pips, and trader B would be -$600.

This is how it looks;

Trader B has 40 pips –  and is $400 +

Makes another larger 10 pips setup: 10 lots x $10 x 10 pips = -$1,000

Now is still +30 pips which is great because can still go around and tell everyone he/she is making pips! However is now -$600

Money and Profits is Only Accounting System

You need to work everything out in Dollar $ terms, from your risk and how much you are prepared to risk losing, to your profits, losses and everything else. Pips mean NOTHING.

No one wins anything for pips. You don’t buy bread or pay your mortgage with pips and as just explained they are false accounting.

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