Tuesday, June 16, 2009

Set a budget management plan and how I work out mine

When I see those trading groups and chat rooms talking about how much money they made or lost doing Forex it occurred to me then when asked what they do afterwards, none of them (the people in the forums) really had a trading budget plan. Of course not to be confused with a trading plan. In the event you gain or lose money what do you do? Cash out or move on.
Let's view this scenario from the sunny side (for a change). Let's say hypothetically you invest $500 in Forex. After all the necessary homework you've done you feel good about a certain trade and decide to place an order. You're analysis were correct and you made a $100 profit that day. Now you have $600 to invest, you do a couple of more trades and by the end of the day your total is $900. Now you're able to place larger orders with higher returns, but how much will you invest? Will you continue on the same strategy until you reach $ 10,000, cash out and pretend you never heard of Forex, or will you move on and try to make $10,000 into $25,000 and so on. I think this is important because I've seen many times (including my own experience), when inexperienced traders have all of a sudden a larger amount to trade with because of a profitable previous trade, they become greedier and risk a higher amount in hopes of duplicating the trade that made them more money, they're 'on a roll' but before you know they've lost all the money that they've gained in all the previously 'smaller' trades, leaving with the same amount of money, or worse less money then they started with. Too often when that happens they let their emotions on the run and try to take 'revenge' on the market by scalping (a type of trading technique) the final dollars they have left. To prevent this from happening, or at least try to, set up a budget management plan. It gives not only a better overview but is also I think more rewarding. I call it the budget 'ladder'.
Now this example is based on my micro lot account leveraged to 400:1 / $2.50 per lot.

The minimum is $50, anything below that figure you have to trade 5k (or 10k mini lots if you're 100% sure about a trade) , anything above that with a $100 maximum it's 10k and so on. If you would work this out in a chart it would look something like this.

If the account balance is;
$50 to $100. Trade 10k/20k lots, beyond $100 until it hits $500. Trade with 20k/30k lots until it hits $1000, if it goes below $500 use 15k/20 lots again. Basically your budget will rise or fall into different brackets. These figures of course can be customized to anyone's budget, trading technique, personal experience and most of all your Forex account. It's good to sit down and go over what your budget options are. I only have experiences with micro lots and my return with this system has been steady with an average of 10 to 20%, it has helped me so I thought I share.

Disclaimer:

All opinions expressed, trade recommendations/advice on this website are solely of John van der Munnik and are not affiliated with any investment firm or any other organization. You should not make an investment only based using this website VDM Trading for your trading needs without seeking help from your own financial advisor.