Forex Tutorial
June 6, 2017

Can money management make Forex trading profitable?

I asked this question myself, and also tried to back it up with some little simulations.

I was able to trade according to the rule of the selected strategy for quiet some time. Then I started to play around doing things that weren’t proven. The profit I was able to made, start disappearing until it got to the point of complete account wipe out.

I made this little simulation in excel, because i want to see…

what if” I am able to be consistence with the money management over long period of trading lifetime (>1000 trades).

what if” The rule i set myself to begin with, doesn’t change… and stay what it should, over the whole trading lifetime.
Will I be able to stay profitable in the Forex market?

This is what the simulation told me…

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The simulation I made will random the outcome of the trades based on the predefined Win/Loss Ratio. Which purely depend on the trading approach (strategy) of the traders themselves.

The result above shows the trader who strictly followed the money management rules, and chose to only risk 0.5% of the capital in trade (assuming the trader only open 1 order at a time, hence DD of 0.5%) and set take profit level according to the Risk/Reward ratio of 2. Even if the trader managed to win only 38% of the time, the trader is still be able to make a total net return of over 100% in a long run.

Based on the same simulation input data. I have also made a statistics preview of over 20 traders that shows the outcome of the strategies that given different win percentage.

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nice designed and useful excel sheet.
you can easily calculate your minimum winrate to stay break-even with this calculation:

min.winrate = 1/ (1+ R:R ratio)
e.g. 1/(1+2.5)= 0.285%

dont forgett to add spread so a 1.0 RR needs over 50% winrate.

Can money management make Forex trading profitable? NO!

I am sorry to burst your bubble, but it seems to me that you are just another lost soul fallen in the meat grinder called Forex! Please, stop preaching the common “wisdom” about risk to reward ratios 1:2 , 1:3 and so on…! You only confuse people, by spreading false information. Your simulations have no connection to the reality of markets. You try to derive some conclusions based on semi-random Monte Carlo simulations. And you miss the most important part – the edge.

Let me clarify some things.
True, money management is very important! I even created separate thread on this topic to share my experience and ideas…… HOWEVER, money management by itself will not make you profitable.

The risk : reward ratio by itself is irrelevant. In fact Win % is far, far more important.

The ONLY way to make money from trading as a retail trader is to have a strategy with an EDGE!
Not only that, but this edge MUST be larger than the transaction cost. (otherwise your strategy is useless).

The only way to find real edge is to search for patterns and elements of NON – RANDOM crowd behavior!
If your strategy does not provide any edge, then the expectancy per trade will equal exactly 0 (ZERO) minus the transaction cost. In the short term you can have some outliers, but as the trade sample grows, the law of large numbers will come into full effect!
In fact, with 0(zero) transaction cost, it is almost impossible to lose money, as long as you keep the risk per trade low. In a large sample, the account will stay at break-even.

Most traders who lose money consistently, will be surprised to learn the their losses are not caused by terrible trading. They are caused by the transaction cost! (commissions, spreads, swaps, slippage… and in some rare cases by fat tail events, aka flash crashes). The transaction cost slowly eats their account because they don’t have any edge!
If you are losing money, try this: calculate your total transaction cost, since the first day you started trading FX, and then compare this to the total amount of money you have lost so far. You will be surprised (as I said).