Hi All,

Though I haven't started trading live yet, I've been investigating different areas of Forex trading and Money Management is very interesting.

I'm sure all you have heard the standard advice not to gamble more than 2% of your total funding on any one trade. I must confess that it sounds like a fairly prudent course of action to take, but is it the best mathematical way to grow your account? I'm going to present a hypothetical scenario and invite all to join in.

These are the initial premises:

a) You are a very experienced trader
b) On average you win 63% of your trades, lose 37%
c) Your fund is growing about 12% per month


Since the above trader knows from experience he's going to hit on 63 out of every hundred trades, and that he's going to average about 12% per month, shouldn't he employ some kind of fixed ratio or mathematical formula to adjust his trades? ....and if so, how would you arrive at it, and what would be the final percentages?

My gut feeling tells me the final ratio won't be too far from 2%. However, since many of us would tend to compound our accounts, even being off by a very small margin can have a huge effect. If the difference was "only" .5%, it will have an incredible impact in a year's time. What if the difference was in the order of 1% ? Just adding the extra 1% to your trades will increase the magnitude of your total profit by 33% !!! (all things considered, including losses!)

I've read on this subject and some fund managers consider risking .5% per trade good. Others go for 1%, a fair number stick to 2%; however, it stands to reason that the performance of a given trader (win/loss ratio), together with his established monthly compounded return, should lend itself to produce a mathematically optimized position size.

I invite all to partake of this debate and I thank you for your input.

moneyline