The Esi-Forex Money Management Method

What Exactly is Forex Money Management?

Well, quite simply, it is a technique that you employ that ensures that you are not unnecessarily risking disproportionate amounts of money on any given trade.

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It is a pre-determined strategy or plan which ensures that for each trade you enter into, you consider the amounts of money at risk, the largest amount of money you would be willing to use and the upside potential of that trade. Only by considering all of these factors can you properly enter into a trade without compromising your expected payoff from trading.

The Three Components of any Good Money Management Plan

There are many approaches to proper Forex money management. Each commentator will have his own unique approach. Nevertheless, there are three components that are common among all approaches and necessarily form part of any successful money management plan.

1. Choosing Your Optimal Trade Size

The focus of money management is to ensure that no single trade or series of trades is able to catastrophically wipe out your whole account. You must live to trade another day after a loss. One important component to guard against this is to have strict rules regarding the size of the positions you take and limits on the number of open positions in your account at any given time.

With respect to trade size, some commentators recommend hard and fast rules such as never risking more than 2% on any given trade. Others utilize risk-of-ruin formulas for choosing optimal trade size.

2. Planning Your Trade Trade - Using Stop Loss and Limit Orders

Once you have chosen your optimal trade size, it is time to plan the trade. This is something very few unsuccessful traders do. Unsuccessful Forex traders are often good at identifying a trend or a good price entry point. Once they do that, however, they quickly jump into the trade and hope for the best.

Unfortunately, the twin evils of trading take control - fear and greed. They leave decisions as to when to limit your loss and when to take profit to be made on a discretionary basis DURING the trade. Unfortunately, during the trade, they are overwhelmed by the emotional aspects of trading and make less than optimal decisions. In fact, they make downright irrational decisions because of their unchecked emotions.

Successful Forex Traders plan their entire trade before they even fire up their trading station.

Planning the trade involves choosing a precise entry point, stop loss point and profit targets for your trade. Your stop loss is a pre-determined point where you will get out of the trade and take your loss if it goes against you. You don't want to leave such decisions to be made on a discretionary basis while you are under the extreme stress of emotion with a trade that has gone bad. Stop losses must be planned BEFORE you enter into the trade.

Similarly, before entering the trade, you should have a concrete plan for when to take your profits. Again, you do not want to leave such decisions to be made on a discretionary basis. Your emotions will get the better of you and you will either exit too soon or wait too long to take profit. Your profit levels or zones must be identified BEFORE you enter into the trade.

Choosing optimal stop loss and take profit points is something that requires much thought and takes some practice. Some commentators suggest implementing standard rules for stop losses and limit orders. For instance, you might be tempted to have a hard and fast rule of setting a stop-loss of 30 pips with a take profit of 60 pips. While this strategy is better than no strategy at all, it fails to take into account market dynamics such as the time frame you are trading in and the logical market based support and resistance in choosing your stops to name a couple of items. There is a better way. Read on.

3. Risk-Reward Analysis

Just because your Forex trading system has identified a possible price direction does not necessarily mean you want to jump into a trade. What is the expected payoff from the trade? What is the downside risk? Is this proposed trade worth the risk?

These are questions that must be addressed for each and every trade.

Any good money management plan incorporates strict rules with respect to risk-reward parameters. Any system that does not is bound to fail.

Your risk analysis will be based upon the amount of money at risk given your optimal trade size and your logical market based stop loss and price targets.

Again, even though you have identified what you believe to be a high probability trade set up, if the placement of logical stops and profit targets does not represent acceptable risk-reward trade-offs, you will not enter the trade.

If it does represent acceptable risk-reward parameters, then you simply enter the trade and trade your plan. At that point, trader psychology becomes critical for managing the trade.

So what is the comprehensive solution to money management . . .

The Esi-Forex Money Management Power Course

At Esi-Forex, we feel so strongly that this single component of Forex trading is so critical to successful Forex trading that we have created our own Forex Money Management Power Course to help you get control and consistency in your trading.

Our Handbook elaborates substantially on the concepts presented here. It outlines our concise three step plan to managing your money with Forex trading. Each component has its own separate part and we illustrate all concepts with concrete examples so you can see how to apply what you have learned.

The course utilizes a variety of teaching methods including:

A detailed written exposition of our money management plan.
Proprietary written materials outlining step by step what you must do to implement the system.
Video tutorials that show the plan in action.
Exercises at the end of each module for you to work through to make sure you have mastered all of the concepts.
Quizzes that test your recollection and understanding of the system.
Online tools such as Optimal Risk Allocators and Optimal Lot Size Calculators
Summary Charts of the Plan

Stop losing your hard earned dollars trading without a plan.

For a limited time, download the Esi-Forex Money Management Power Course Primer FOR FREE.

This primer outlines the the proprietary Esi-Forex method of money management. It will immediately allow you to begin implementing sound money management techniques into your daily trading plan.

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