Forex

Money Management - 2%-6% rules

Hi there!

In this series of articles i’m going to introduce to you some of the best money management concepts/methods that have been developped by great forex and stock traders.

All of us heard and read about how important the money management but the most of us have been lost in finding clear money management strategies to follow. Our money management strategy today is very simple and easy to follow; it,s the 2%-6% rules.

The 2%-6% rules money management strategy was introduced by Elder Alexander in his book “Come to my trading room” in chapter 7 that labeled “Money Management Formulas”.

Sharks and piranhas :

Elder says “The goal of money management is to accumulate equity by reducing losses on losing trades and maximizing gains on winning trades.” and he affirm that Everyone in the market (competitor traders and brokers) want to eat your money, they have two ways to eat your money:

1- A big single shark bite that wipe of all or the most of your capital.

2- A series of small piranhas bites that none of them is lethal alone but which together strip an account to the bone.

The 2%-6% rules is the Money Management method that protects you from the sharks and piranhas.

2% limit rule:

The first thing you have to do to keep your account away of the sharks is to limit your lose at any trade to 2% of your equity. Do you have 10000USD in your trading account? So, you have to risk 10000 x 2% = 200USD in any of your trades. You have to set your stop loss to this level and you have not lose at any trade you make more than 2% of your equity. Some of professional traders use less than 2% but no more than 2%.

Whenever you make a loss or a profit you have to recalculate the 2% of the equity to know your new maximum risk per trade. For example if you made a profit trade and your account now is 11000USD, your maximum risk will be 220USD. At the other hand if you made a loss and and your account now is 9000USD, your maximum risk will be 180USD.

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