In our free special report we covered money management extensively, if you have not yet read it I urge you to download your free copy here as it gives a foundation for what will talk about here. Money management as you should know by now is essential to your ultimate success as a trader, in this module I will expand on two additional topics
Correlation
Correlation is the tendency of a currency to mimic each other. For example if the British pound moves in the same direction as the euro 90% of the time, taking a long trade in the euro and the pound at the same time you may be doubling up on the same trade. If your plan is to risk 2% per trade then taking these two long positions you will be risking 4%. This would exceed your maximum risk per trade.
Although each market needs to be examined individually traders certainly need to be aware of the correlation. Correlation between markets change frequently and you will need to be constantly monitoring them to see which ones have high correlation and adjust your money management rules accordingly.
If you find yourself in the position of having two great trades in markets with high correlation I will advise you to take the two trades but split the risk. For example if you want to go long the Eur/Usd and short the Usd/Chf (which generally have a high negative correlation) if your maximum risk per trade is 2% you may split the risk 1% between them both. If you feel strongly about one of them over the other, some discretion can come into play and you may split the risk 1.5% to 0.5%.
System Win/Loss Ratio
The win loss ratio of your system should determine how much is risked per trade. There are traders who consistently make money out of the market with only 30% of trades being winners. When they do have winners they are often huge winners from 2 to 1 to as high as 10 to 1.
So the question of how much to risk per trade would depend on your own testing of the trading system you have designed. If your win to loss ratio is in the region of 30%, risking 3-5% per trade, a string of losses of 10 in a row (which is highly likely with such a system) may have you down anywhere from 30-50% which would be unacceptable. If you read the EBook I worked out the numbers as to what it would take to come back from such a huge deficit. Risking 0.3-0.5% may make more sense.
If your system on the other hand has a win to loss ratio over 60% you could risk more per trade. The exact level of risk would depend upon the testing of your individual system and your tolerance for losses. In the newsletter I give traders responsible money management plans depending on how conservative or aggressive they may want to be.
As you have read above the art of making money in the markets is more involved than simply finding the right entry techniques. Your money management plan has to be well thought out and the strength of it will play a major part in determining your eventual profitability.
