Money Management in Trading

I believe money management is the key. This needs to be a marathon not a sprint. One thing I've realized is that you can't use the same lot sizes for all of your trades. For example on one trade you might be risking 30 pips and another 20 pips. So if you trade 4 lots on both of them (standard account) you'd be risking $1,200 on one trade and $800 on the other. That's not good money management and it can get you a person in trouble.Here's what I do.....

When I position trade (4hr and daily charts), I won't trade unless I have a 2:1 risk reward ratio. I figure out the proper stop loss for my trade, based on TA. So for this example say that's 40 pips. I then make sure based on TA that I'm comfortable getting at least 80 - 120 pips profit. Once i'm comfortable I put my information into the following formula.

S = (E*R) / (P-X)
($ amount willing to Lose on this ONE trade ) / (entry price - predetermined stop loss price)

S = Size of Trade
E = Account size (Cash)
R = Maximum Risk percentage per trade
P = entry price on the trade
X = pre-determined stop loss or exit price

So let's put in some numbers.....

My account size $10, 000
Entry price on EUR/USD 1.2600
Currently I'll risk 3% of my account on a trade
My pre-determined SL is 1.2560

So how many shares of EUR can we buy with our money management rules??

S=($10,000 * 3%) / (1.2600 - 1.2560)
S = $300 / 0.004
S= $75,000
( each lot is $100,000 you can buy only 75% or 3/4 of a lot to lose ONLY $300 on determined STOP Loss of 40 pips )


S = $300 / 0.004 ( 40 pips) => 40 pips are worth $400 =>
S = $300/$400
S = ( 300/400 ) * 100% as % => 75% of a LOT or 3/4 of a ONE LOT ..

Anyway this is the way I do it. I hope it helps...