A while back I had a conversation with a fellow trader. He asked me how many pips I gained off my last trade. I told him, “400 pips”.

He inquired on the trade before that.  “550 pips”, I answered.

His jaw dropped. “You made nearly 1000 pips in two trades,” he said in shocking disbelief, “You must be loaded!”

I turned around and asked him the same question, “30 pips on the first trade, 15 pips on the second trade.”

That was the difference between us. Based on where he was trading, 400 pips would seem like a lot. In his mind, I must have been some sort of master trading making oodles of money. At one point he even did express on my account size, and commented that one day he’ll trade that many pips when he was a large enough capital. Truth is, that even someone with a 100 dollar trading account could have still achieved the pip size I had. 

This trader was most likely making a decision to base all his trades with the same pip size. Say for instance, this trader decided to trade 10 dollars per pip. You can see how his eyes widened when he discovered I was taking down 10 times more pips than he was.

When talking with this trader, it was discovered that he bases his lot size off of his bankroll. For every 1000 dollars he had in his account his lot size was .1 and he never exceeded a 20-pip stop loss. Now there’s nothing wrong with this particular management system as long as he is trading the exact same thing every time.

However, you and I both know, the market is not that consistent.  A similar trading set up can yield a vast variety of results. So when this trader is in the market, he is putting himself at an unnecessary risk as he is setting a hard line rule for an ever-evolving market. A wise trader does not look at pips alone to determine lot size. But rather it adapts to the stop loss that is necessary based on what the market is doing.

My lot size will always vary. I first look at the market to determine where a sensible stop loss should be if I am in the market. From there I calculate how many pips. With this knowledge I then look at the size of my bankroll and ensure that the trade I am entering will have a lot size that will not exceed 2 percent of my bankroll.

When you are thinking in terms of percentages, not pips, you are giving yourself a broader view of the market. You are able to adapt to current market conditions. And you will ultimately become a better trader than one that limits the way he concocts lot size.

No matter what your trading system is, you should never risk more than 2 percent in any trade.

Sticking to strict money management can be very difficult at times. Over your years of trading there will be countless times when your stop loss will be hit, only for the trade to turn into profit later. This can be extremely frustrating for traders, as they knew they were right, however the market betrayed them.

The worst thing you can do after a loss is abandon your money management. At times, a trader feels as if they need to somehow earn their money back from the market. If this emotion overwhelms their decisions, it can lead to a violation of a trading system’s rules.

There is a common money management system that many traders fall prey too.  Let’s say a trader has a goal to win $100 a day. In the first trade, if they lose the entire $100, the trader will put in another order and risk $200. That way if the trade becomes successful, the trader would have made their money back that they just loss, and still won the $100 they were looking to achieve.

But what would happen if they lost that second trade. The trader would then have to risk $400. If that trade wins, then the trader would have made back $300 in losses and still have the $100 goal in profit for the day.

Sounds easy right? How can one lose?

What if that trader losses yet again? $800 would now be at stake to only obtain $100 in profit. That alone should scream a violation in sound money management.

This particular money management system I have just described even has a name. It is called the Martingale Betting System and it has been around since the 18^th century. Mathematics has proven this method of trading to be an absolute loser. You literally would need an infinite amount of money for it to be a success.

Simply put, over time, any martingale-based system will experience enough consecutive losses to bust any fixed bankroll, plain and simple. Do not for a second think that you are an exception to this rule. If you trade it, you may even have success for years, however in the end you will lose everything. All that time spent and in the end you lose all your money. What sense does that make?

To be a success in online currency trading, you need to have an edge in the market. You have to be able to utilize a system that allows you to take more in than you give back. And you will always give back as every sound trading system should anticipate routine losses.

Despite the hundreds of currencies in existence, only a handful is heavily traded on a daily basis in the Forex markets. . The currency pairs that see the most activity are considered the Majors. The Majors consist of GBP/USD, EU/RUSD, USD/CAD, USD/JPY, USD/CHF, and USDAUD.

Do you see one common denominator amongst the majors? The United States Dollar is traded in every major currency pair. Currency trading pairs that do not include the USD are considered to by cross rates. And example of a cross rate would be GBP/JPY.

When the Dollar moves, a lot of times you were see correlation between the Majors. For instance, if GBP/USD is in an uptrend, it is common to see that USD/CAD might be in a downtrend. Keep in mind, not always will that be the case, but generally speaking the two move against each other.

Money management is one of the most important elements in a trading system. In any given trade, no matter how good it looks, you should never risk anymore than 2% of your bankroll. If you have $10,000 in your account, the maximum risk you should allow yourself is $200. So if your trade has a 100 pip stop loss, you would want to risk no more than $2 per pip. A common mistake traders make is to base their pip size in direct relation to their bankroll. For instance a trader might risk decide to risk $1 per $1000 in his bankroll.  Trading in such a fashion has no regard for the amount of risk per trade. On a larger trade, such a method of trading could be financially devastating.

Knowing that you should never risk more than two percent per trade, you should be mindful of which currency pairs you are trading if you trade more than one. For instance, you might analyze your charts and decide that EUR/USD is presenting an excellent opportunity for you to short. Likewise, as you scan through the charts, you see the GBP/USD is also looking good to short.

You decide to go ahead and place both short orders and risk 2% each. Both pairs start to move in the same direction as the news for USD was released. The news was positive for the USD and both pairs drop. Your profit targets were hit on both pairs and you took an 8% gain that day, assuming your risk/reward was 1:2.

While you were profitable in this particular trade, it is my belief that you in fact were overtrading. The news was moving both pairs because of the strength behind the dollar. As a result you were actually risking 4% on that one move. While it might have worked this time, what if it didn’t? Your bankroll would have taken a 4% loss on the same move.

An easy remedy would be to only trade one or the other. Take whichever pair looks to give the highest probability of success. Since you are risking the same amount on either pair, the amount of pips won or lost is irrelevant.

The FX Trading Network has recommended brokers with excellent charting programs. Having the ease of checking various pairs, even at the same time, can go a long way in helping you see the bigger picture with each trade.