As we learn to trade, money management becomes probably the most important key to

trading. To help you in the money management department I have decided to write a page on
this subject.

1. GOALS—Before trading live you need to state your goals for trading and then compare
them with your finances to see if it is reasonable. During my almost 5 years of trading, I
have noticed my goals have changed over time. They may have started, I can make a
full time income to I would like to make a part time income to I would like to pay off
some bills to be nice to make some money at this to now that I can make some money
what should I really do? Your goals will determine your trading style and trading
decisions. When I start trading this near year I wanted to have some solid achievable
goals. I looked at a compounding interest table and put in some numbers to see what
would be reasonable trading goals. This is what I discovered.

a. At 2.5% increase per week for 5.5 years I could increase my balance of 1000
dollars to 1,264,000.00. What does that mean, If I average 25 dollars per week
with 1000 dollars, 50 dollars a week at 2000, 125 dollars a week at 5000 dollars
etc. I would have 1,000,000 dollars in approximately 5.5 years. If I started with
2000 dollars it would take me 4.7 years.

b. This helps me in 3 ways: 1. How much money should I have in my account to

reach a certain income goal? 2. What should my lot size be to account size to
reach this goal? 3. How many pips a month do I need to make to reach my goal?

c. Let’s start backwards. I have consistently made over 1000 pips per month trading
my various systems over a year’s period. In other words I set a goal of making an
average of 250 pips per week. How big should my lot size be to reach my goal?
You would need to trade ten cent lots to make 25 dollars in one week at 250 pips.

d. So my goal as on average every day would be to make 50 pips at ten cents a pip.
Of course we know it doesn’t work this way but that is our goal. Some days,
weeks and even months are negative profit.

e. Once I have looked at my goals I then trade to reach these goals and a system to
match.

f. Trades that aren’t meeting my goals are then eliminated and the ones that are
kept or profits are pocketed. If I have days, weeks, or months that exceed my
goals I then use these excesses to eliminate trades to break even or cover days,
weeks or months that are not winners.

g. With these goals in mind I now can trade according to my goals and not my
feelings or impulses. Every action I take trading is directed to meeting my
averages so I can reach my long term goals.

2. So what determines my lot sizes? My goals versus the amount of money I am willing to
trade to reach those goals.

a. If I have 1000 dollars, I would be willing to trade max ten cent lots. What does
this mean? If price goes against me 10 pips it would be a 1.00 loss, 100 pips is a
10.00 loss, 1000 pips 100.00 loss, 10,000 pips 1000 dollar loss. If you lose 10,000
pips you need to get into a different line of business, FOREX trading is not for
you. If you lose 10,000 pips then you only lose 1000 dollars and you would need
 to find something you are better at. Just look at it as tuition and a change of
majors.

b. If you have 1000 dollars and double it to 2000 dollars at 50 pips a day, it would
take you 28 months and by then you would consider yourself good enough to
trade like the big boys. That is your tuition time and some money. But you would
be ready to be a professional trader. You actually would be better than me
because it took me almost 5 years to make over 10,000 pips.

c. So to have the compounding effect I desire to reach my goals I trade ten cent lots
with 1000 dollars. When I reach 120 I can then go to twelve cent lots. 2000= 20
cents lots and so on. This gives me the breathing room to trade without fear of
wiping out my account and not having trades so big they could wipe out my
account. If a news spike hits and all of a sudden I found myself 100, 200 or 300
pips in the hole money wise I am down 10, 20 or thirty dollars. These type of
mistakes or errors do happen and I don’t have to beat myself up for making such
mistakes.

d. Trading like this also lets me trade multiple currencies. I remember when I used
to trade one currency at a time. It seemed if I traded gbp/usd, the eur/usd would
move 150 pips and the gbp/usd would move 20. I never seemed to get the right
currency pair. However, now I catch the big moves on one pair and pocket the
small amount on the other. If two pairs go against me 5 others may make profit
and still make my day profitable.

e. The bottom line is this, trade in a way you can trade another day if you have a
bad day. If you are good you will make money. If you are not then losing 100
dollars after 1000 pips in losses is a whole lot easier to take than trade 1 dollar
lots and losing 1000 dollars. If your good enough to take 1000 dollars and turn it
into 10000 using dime lots then you are good enough to trade 1.00 lots. The
bottom line is this, YOU ARE GOING TO PAY TUITION TO LEARN FOREX. You can
pay Harvard University prices and trade dollar lots or you can pay community
college prices and use penny lots. How much you pay for tuition is up to you.

Good luck,

Nanningbob

January 1, 2011