Money Management Styles and Methods in Gold Trading
The best way to practice successful money management in Gold trading is for a trader to keep losses lower than the profits they make when trading. This is called risk to reward ratio.
High Risk: Reward Ratio
This risk: reward ratio method is used to increase the profitability of an investment strategy by trading only when you have the potential to make more than 3 times what you are risking when opening a Gold trade.
If you invest using a high risk reward ratio of 3:1 or more, you significantly increase your chances of becoming profitable in the long run when trading Gold metal. The chart below shows you how this concept works:
In the first example, you can see that even if you only won 50% of your XAUUSD trade transactions, you would still make a profit of $10,000. Even if your win rate went lower to about 30% you would still end up profitable as shown on the second example above.
Just remember that whenever you have a good risk: reward ratios, your chances of being profitable are much greater even if you have a lower win percentage.
Never use a risk: ratio where you can lose more pips on one trade than you plan to make. It does not make sense to risk 1,000 dollars in order to make only 100 dollars.
Because you have to win 10 times more to make 1,000 dollars back even if you lost only 1 trade.
If you ONLY lose once you have to give back all your profits from the other ten winning trades.
This type of investment strategy makes no sense and you will lose in the long term, guaranteed!
Percentage Risk Method
The percentage risk method is a method where you risk the same percentage of your account balance per every transaction.
Percentage risk based method specifies that there will be a certain percentage of your account equity balance that is at risk per trade. To calculate the percent per every trade transaction, you need to know two things, the percentage risk that you've chosen and lot size of an open order so as to calculate where to put the stop loss order. Since the percent is known, we shall use it to calculate the lot size of the order to be placed in the market; this is known as position size.
If you have an account balance of $50,000 in your account and risk percent is 2%
Then 2 % is equal to $1,000
If three investors buy XAUUSD and the first one is using 100 pips stop loss, second one is using 200 points stop, third one is using 250 points stop, and their position size will be:
Stop loss = 100 pips
Risk percent = 2 % = $1,000
100 pips = $1,000
1 point =1,000/100= $10
Position size is 10 lots (for 10 Gold lots 1 point movement =$ 10)
Stop loss = 200 pips
2 % = $1,000
200 pips = $1,000
1 point =1,000/200= $5
Position size is 5 lots (for 5 Gold lots 1 point movement =$ 5)
Stop loss = 250 pips
2 % = $1,000
250 pips = $1,000
1 point =1,000/250= $4
Position size is 4 lots (for 4 Gold lots 1 point movement =$ 4)
Example: If a trader with $50,000 wants to calculate annual income from his strategy
Annual income: If your trading system has a win ratio of 70% and your risk reward is 3:1, and your stop loss is 100 pips and take profit is 300 pips and every month you make 100 trade transactions trading standard lots, then your maximum annual income will be about:
For 1 standard XAUUSD lot profit per 1 pip is $1
100 transactions*12 months = 1,200 transactions
Wins and Profit
70% win: 70% of 1,200 = 840 profitable transactions
840 transactions * 300 pips = 252, 000 pips
252,000 pips = $252,000
30% losses: 30% of 1200 = 360 losing transactions
360 transactions * 100 pips = 36,000 pips
36,000 pips = $36,000
Net Profit = 252,000 - 36,000 = 216,000 pips
Income: 216,000 pips = $216,000
The above is just an example of the amount you will make that will depend on the risk: reward ratio of your Gold trading system along with its win percentage ratio.
Other factors to consider include:
Maximum Number of Open Position A final point to consider is the maximum number of open positions - that is the maximum number of trades that you want to be in at any one time. This is another factor to decide when managing your account capital.
If for example, you chose a 2% risk management method per trade, you may also say chose to be in a maximum of 5 positions at any one given time. If all 4 of those positions close at a loss on the same day, then you would have an 8% decrease in your account balance that day.
Invest Sufficient Capital One of the worst mistakes that traders can make is attempting to open a trading account without sufficient capital.
The trader with limited capital will be a worried investor, always looking to minimize losses beyond the point of realistic trading, but will also be frequently taken out of the transaction before realizing any success out of their trading strategy.
Exercise Discipline Discipline is the most important thing one can master to become profitable when trading gold online. Discipline is the ability to plan your work and work your plan when trading Gold.
It is the ability to give a Gold trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to stick to your trading plan rules even after you have suffered losses. Do your best to cultivate the level of discipline required to be profitable when trading Gold online.
Managing Account Capital Basics
Money management is the foundation of any Gold trading system as it helps investors to get profit transacting on the online spot Gold trading market. It is especially important when transacting in the leveraged online Gold market.
If you want to invest successfully in the online Gold market you should realize that it is very important to have an effective trading strategy of money management because you will be using leverage to place your trading orders.
The difference between average profits and losses should be strictly calculated, the profits on average should be more than the losses on average, otherwise trading Gold will not yield any profits. In this case an investor has to formulate their own trading rules; success of each person depends on their individual traits. Therefore, every investor makes his own trading strategy and formulates their own money management, based on the above guidelines.
When you are placing your XAUUSD Gold trading orders put your stop orders in order to avoid huge losses. Stop orders can also be used to lock in profit and get additional profit.
Consider the chance to get profit against loss as 3:1 - this risk: reward ratio should be favorable more on the profit side. Considering these rules and guidelines, you can use them to improve profitability of your trading strategy and try to develop your own strategy that will possibly give you good profits.