Money management is a MUST in every trading systems, whether automatic or manual. Your money management will affect your drawdown, your profit and overall success in trading. In this article I will describe some of the WRONG money management attitude, and show give you tips that will help you reach smaller drawdown, and more profit.

Tip 1: Martingale\Averaging doesn’t work
One type of systems many novices attract to is Martingale. These systems double up the stake after each loss, so one win will make up for all previous losses. The more couragous will even add up to their position if the market is going against them, to catch a bigger move on the road back. Well, I am sorry to shatter your hopes but these kind of systems doesn’t work. Mathematically, it will take about 7-10 consecutive losses for your account to wipe out completely, without any chance of winning back your money. For a few weeks this money management can keep you alive with steady profit, but once a couple of months you will reach a string of losses that will put your account to death. Bewarned.

Tip 2: Risk a constant, small percent of your equity on each trade
Veteran traders know well that each trade is a statistical event and as one, its outcome is random. Staking a big percentage of your equity of a single trade can guarantee your wipeout. Eventually, even a short string of losses can diminish your funds completely.
However, if you risk 1-3% of your starting equity in each trade, the probability of a string of 33 consecutive losses is very small and not likely to ever happen (providing that your strategy is profitable). Keeping your stakes small gives you a chance of surviving the markets.

Tip 3: Do not confuse equity risk with pips risk
A common mistake is adjusting your stop loss based on your equity. The two have no relation and shouldn’t affect your decisions. Your stop loss should be defined only by analytical reasons, such as Support and Resistance, Indicators, etc. Then, your lot size should be modified, to match the percent you are willing to risk. Always adhere to your equity risk limit and change your trade size to match it. This is how you will use logical stop losses and simultanously risk in conservative amounts.

I hope these tips can enrich your trading systems and maximize your profits. It surely maximized mine.

Michael Wells is the lead programmer in FXCode Inc. He has been programming Expert Advisors and Custom Indicators for Meta Trader for 3 years. Visit FXCode to automate your trading system!

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