I have read somewhere that the biggest difference between successful and unsuccessful traders is not their ability to read charts but their ability to manage risk. And although some people might find this strange, this statement makes a lot of sense to me. Risking only a certain percentage of your capital might reduce the possible profit, but will keep you in the business longer.

For an introduction to Money and Risk Management I suggest checking out these online resources:

• The Money Management FAQ of the Turles
• This excellent blog entry

A free online position size calculator can be found here.

Lot size

Some people like to use a fixed stop, and then use that value to calculate the lot size. I find this a rather strange method as it does not allow for a natural place for stops, but it is a valid approach.

Example:

stop = 10 ticks
1 tick = 10 EUR/contract
-> risk = 100 EUR/contract.
Account = 100.000 EUR -> 10 contracts for a max. risk of 1.000 EUR.


This is a valid approach, but I prefer starting with a well placed stop, and then using the stop-size to calculate how many contracts I can trade without risking more than 1% of my account on that trade. So in trades where my stops needs to be 20 ticks away my position will be half the size of when starting a trade where my stop is 10 ticks away.

Example 1:

stop = 5 ticks
1 tick = 10 EUR/contract
-> risk = 50 EUR/contract.
Account = 100.000 EUR -> 20 contracts for a max. risk of 1.000 EUR.


Example 2:

stop = 20 ticks
1 tick = 10 EUR/contract
-> risk = 200 EUR/contract.
Account = 100.000 EUR -> 5 contracts for a max. risk of 1.000 EUR.


In cases where my position is smaller than I am used to, I add to my position as soon as the trade goes enough into the correct direction so that I can pull up my stop. In fact, some traders like to start out very small and then add when in profit, which is also a very valid approach.

An additional benefit this method is that it makes you think about stop placement, thus avoiding that you enter in bad trades (where a natural place for stops is too far away).

Additional rules

Next to this simple calculation of lot size, I have some additional rules:

• I never take a trade where the stop loss is further away then the initial profit target.
• I never take more than 3 trades at the same time. This limits my maximum risk at any given time to 3%.
• I have some rules concerning when to take some profit and when to move stops to lock in some profit (as I like getting paid for the risk I take).
• I have some rules about taking money out of my account. Initially I took off 50% after doubling my account, now every month I take of 50% of my winnings of that month. This allows my account to grow while still ensuring I make some money.
• I never average down. Never!

These rules ensure that I am in control of my risk, that I take a loss when proven wrong and that I never let a winning trade turn into a loser.

There are old traders and there are bold traders. But there are no old bold traders!