Money management is very important. In my opinion, it is as important as the technical part of trading (in our case, trading with Fibonacci). You may be a great Fibonacci trader, but without good money management, you are still going to fail.
What does good money management mean? It means that you do not risk too much of your money and even after a lost trade you have the capital to invest and build your wealth.
It is not enough to decide that you are not going to take risky trades. You are not able to switch off emotions completely. And where there are emotions, there are also mistakes. That is why you need a good plan. The best way is to write it down and correct when necessary. This plan should contain several positions:
• Your trading account size
• Maximum risk
• Where you place stops
• When you take profit
• Number of lost trades you stop trading after
Stop losses and the 1% rule
Some traders prefer not to set stop losses because they are afraid of “stop-loss hunting”. I will not tell you what you should do, but unless you are a very experienced trader, forget about that and always set stop losses. It does more good than bad and it can protect you from a bigger loss. Let’s assume that you haven’t set the stop loss. Suddenly, the price falls down instead of rising as you wished. And it falls hard. You want to close the order, you know that it is something you should do, but some voice tells you to wait. You try to convince yourself that this is only a correction and it will end soon. Yeah, sure…
With a stop loss in place you curb your emotion levels to the minimum, so you do not have such doubts.
The other important thing is how much you should risk. You have probably heard about the 1% rule. Yes, 1% is not much, but it is a good rule. The main idea is that you shouldn’t risk losing more than 1% of your whole trading capital. So, if your trading account is 10000$, you shouldn’t risk more than 100$. I know what you are thinking right now: “with this rule, I will have to place very small positions”.
Yes, if you want to place bigger positions, increase your account size. I know this is hard, but you cannot count that you will get lucky and make 100.000$out of 1000$.
Without a proper account size you are not able to create a good money management system, and therefore, most probably you are going fail soon. This is the harsh truth.
It is true especially in our case when we use the Fibonacci tools. Entries are fast, stop losses are tight, and our main goal is to get a few points of profit on the bigger leverage. To be able to do that, you must have enough money to invest.
If you are short of money but want to make millions, you start to take very risky positions and, as a result, you are probably going to lose everything.
What to do if your account is not big enough?
Do not worry if you do not have enough cash right now. Simply trade on the lower leverage. Thanks to this you will be able to keep the 1% risk ratio. Do not think that you are not going to make any good money with such small positions. Okay, you are probably not going to. But what you are going to gain is valuable experience and knowledge. It takes a lot of time to learn how to trade successfully. Use this time to figure out how to get more money that you can later invest.
This way, when you get enough money, you will be ready.
This is the right path to succeeding in investing. A very small percentage of traders have got rich starting from small amounts, such as 2000$.
Just stick to the 1% rule and you will be in the 10% of best traders who follow their money management.
What if I still do not like the 1% rule?
Look, I get it. It is not something easy to use, but this is a great tool to protect your capital, mostly from your grid. If you still want to risk more than 1%, and you believe that you are ready for it, I will give you some advice. Divide your trading capital and pay it into two separate accounts. It is best to keep an 80:20 proportion.
Now you have two accounts –in the first one there is 80% of your money, and the rest 20% is in the second one. You are going to trade both these accounts, but with a different approach. With the bigger one, you are still going to stick to the 1% rule. It is because this is where most of your money is and you want to protect it.
You are going to trade with a bigger risk using your second account, so you can increase the maximum loss you can take up to 3-4% of your account. It may not seem a lot, but believe me – it is. If you can make good investing decisions, both your accounts will grow, even the smaller one. You are going to have bigger profits from that account because your positions are going to be quite big.
If you fail to trade successfully, your loss won’t be so painful. Of course, you are probably going to lose most money from your smaller account, but most of your cash is safer at in the bigger one.
As I have already said, I recommend using the 1% rule for all of your trading money. But if you want to trade bigger positions, try my way and divide your account into two separate ones. This way, you are going to monitor your readiness to trade big positions.If not, you should stick to the 1% rule and build your main account.
Raising the stop loss order
I have discussed this before, but let me explain it more deeply. You should remember to raise your stop loss order when your trade is profitable. You do not have to rise to entry point immediately, but you can do this step by step.
You can plan it in advance. For example, my plan looks like this:
I open a position and set the stop loss (for instance) 10 points below the entry point. The price is rising and is about to break through the recent high (point B). I raise my stop loss and it is now only 5 points below my entry point. The price continues to rise and my first target (the 127 extension) is hit. I close 1/3 of my position and raise the stop loss up to the entry point. At the moment I have a profitable trade. I have booked profit and even if things get worse and the price falls, my stop loss is at the entry point, so this will only scratch my position.
It is hard to learn to strictly follow the plan, but you should try anyhow. If necessary, write it down, print and hang over your desk.
Following the 1% rule and managing your trade by closing parts at the extensions and raising the stop loss increase your chances of success in trading considerably!
When you enter a trade, you place your stop loss in the first place, somewhere below the entry point (in the uptrend). When you see that your entry has been correct and the trend is going up nicely, you should raise your stop loss up to the entry point. This way, even when there is a strong sell-off, you just scratch your position and avoid loss.
In the example below, there is a 1-hour Eur/Jpy chart. After a break above the resistance the 200 SMA, there is a great place to open the position. You place the stop loss below the moving averages, around 97.50 points.
After several hours we can see that uptrend is strong. Our trade is in profit right now, so we can move our stop loss up to the entry point (around 98.40). This way, we can be sure that we won’t lose in that trade.
If the trend continues upwards, we can raise the stop loss, even more, to make sure that we close the trade with profit.
It is a simple rule, but on numerous occasions, it can help you save a lot of money.
The advanced guide to fibonacci trading - parts:PART 1. INTRODUCTION
Basic information about Fibonacci numbers and why it is good to know how to use them.
PART 2. THE FIBONACCI RETRACEMENT LEVELS
How they are build and how to draw them to find possible leveles during correction.
PART 3. THE FIBONACCI PROJECTIONS
How to predict where is the best place to exit trade - Fibonacci Extension and Expansion will be helpful here.
PART 4. THE FIBONACCI CONVERGENCE
Learn what convergence is and how to spot it.
PART 5. WHEN TO ENTER A TRADE – A SAFE SCENARIO
Here we put knowledge into practice - you will learn a safe way of opening positions.
PART 6. WHEN TO ENTER – A RISKIER SCENARIO
Little bit riskier scenario of opening trades where possible profit is bigger.
PART 7. WHEN TO EXIT A TRADE
Closing trade is very important, but where is the best place? This should help you to find the best place to exit.
PART 8. MY TEMPLATE
Few examples of different templates you can use in Metatrader software.
PART 9. A FEW IMPORTANT THINGS YOU SHOULD KNOW
How to define trend, the importance of the higher time frame and how to trade the news with Fibonacci tools.
PART 10. FIBONACCI AND PIVOT POINTS
How to combine Fibonacci tools and pivot points.
PART 11. MONEY MANAGEMENT
Proper money management is very important - without it you will be loosing money fast.
PART 12. MORE EXAMPLES OF TRADES
More exapmles where we put together knowledge from guide.
13. THE “HOW-TO” ARTICLES
Few helpful articles about installing templates and using Fibonacci tools.