In my last email on money management I gave you some suggestions.  I suggested that, in order to trade without fear and control your risk you should trade 10 cents for every $300 you have in your trading account.  I suggested a risk percentage of no more than 3-5% per individual trade and no more than 25-30% if you are holding several positions.

Starting with an account balance of $300 and putting on a trade with 5% risk means a stop loss of $15.  Now that means, in order to put on one trade will tie up $45 in equity.  That's at 10 cents per pip and a 3% equity requirement to on the trade.  A micro lot is $10,000. 3% margin on that is $30.  Add $15 stoploss to that and we have a total of $45. Therefore, All it takes to put on one trade is $45.

Let's say you open your account with $300.  Let's say we are still learning how to trade and don't want to risk our entire $300.

The $300 is the minimum deposit required to open an account.  After you open the account you can take out $200 to leave $100 in the trading account.  After all, you only need $45 to put on one trade and that means you can put on two trades with $100.  Your remaining $200 is sitting in your bank account.  You can always put what you need into the trading account as needed.

Working with $300 means our total risk threshold for holding multiple trades is $90.  Our Maxim total risk threshold is 30% of our $300.

Two open trades will hit the limit of this threshold.  Then, with $300 working capital we can have two open trades at a time.  Doing it this way helps our discipline.  The psychology is this...The more we have in our trading account the more prone we are to over trade or take lessor trades because we always know there is a cushion.  If we have to go through the process of adding additional funds to the trading account from our $200 in the bank we have a mechanism to short circuit our natural tendency to take more risk than our working capital justifies....

Also, remember that brokers go belly up ( I've lost large sums twice in my career when brokers went bankrupt ).  I've had all kinds of issues dealing with withdrawing my funds from brokers over the last 25 years of trading.  Looking at it from the perspective I've outlined thus far, takes into consideration, not only our own human psychological weaknesses but, situations that can occur when dealing with shady brokers.

  Never let your broker become your banker and when you're trying to make serious money you only need to keep about $2,500 in your trading account.  $5000 max.  The safe way is to grow your account by systematic compounding of winnings. Not by taking larger risk by taking larger trade our capital from $300 to $600 we can go from 10 cents a pip to 20 cents a pip.

Okay, we've double our account from $300 up to $600.  Now, when we double $600, that will mean $1200.  Thus, when we add another contract to our trades it does''t go from 20 cents a pip to 30 cents a pip.  It goes to 40 cents per pip.  If we double the $1,200 up to $2,400 we are then qualified for, NOT 50 CENTS PER PIP BUT, 80 cents per pip.  This is called geometric progression.  doubling works like this...

1=2,  2=4,  4=8,  8=16, 16=32, 32=64, 64=128, 128=256, 256=512, 512=1,024, 1,024=2048, 2,048=4,096, 8,192=16,384, 16,384=32,768, etc...

You see, that is the way to grow our account without feeling we have to consistently nail huge trades.  If we risk $15 we should be satisfied if we make $30.  The profit is double  the risk .  We can apply the same principle of compounding and apply it to risk reward.

We can get as complicated as we want with money management but to be truthful, it's pretty much basic economics of scale that we learn in high school economics.  What is meant by economics of scale?  well, take the examples we've discussed above.  The financially illiterate person, and trust me, that is the person whom always knows more than everyone else and don't know jack...

That financially illiterate person will say, "How does that example help me.  I'm working with $10,000 or more.  You're talking about a low class $300.  You don't hear all that I hear so it happens all the time...If he/she really knew just the basic high school principle of economics of scale and compounding, they would know that it's no different for them.  They just start from a higher number in the geometric progression.

Nothing changes.  Instead of attempting to double $300 they are attempting to double $10,000 in the same exact way as outlined above.

Now you can see that there is no mystery in money management.  The mystery is this...I learned this from floor traders in my first year of trading.  This was the standard of money management before computers.  Before all that fancy money management software.

Listen...

All that money management software is really designed for those that are managing accounts for others or in a position where they have to justify their trades to others.  But all we have to do is just focus on compounding for each level, step by step.  You know, kind of like actually growing a business.  lol

To sum it up..I can use a $300 example because most traders who come to me have lost money and their account has fallen to $300 to $1000 dollars.  However, even if you have $100,000 , the same that applies for the little guy applies to you...