Skip to content Now that you've mastered technical analysis and the basics of fundamental analysisNow it's time to talk about the most crucial aspect of trading: money management. It's what separates profitable traders from those who lose their capital.
Learning money management in trading isn't optional - it's the absolute basis for surviving and thriving in the financial markets. Without proper money management, even the best analysis won't save you as a beginner.
In this chapter, we'll look at how to protect your capital, calculate your position size, use stop loss and take profit orders, and create a comprehensive capital preservation plan.
Independent trader since 2012
Money management is the set of rules and techniques you use to manage your trading capital.
Money management answers 4 essential questions:
A statistic that should make you think: 95% of novice traders lose their starting capital within the first 3 months. Why do they do this? Not because of poor analysis, but because of a risky and disproportionate approach.
Classic mistakes that kill trading accounts
→ Risk too much per position (5%, 10% or even 20% of capital)
→ Don't use a stop loss ("I'll wait for it to go back up")
→ Excessive leverage (using 1:500 when just starting out)
→ Lack of a trading plan (feeling trading with no rules)
→ Revenge trading (wanting to recoup losses quickly)
Capital preservation = your main objective
As a beginner, your goal is NOT to get rich quick. Your goal is to preserve your capital for the time it takes you tolearn to trade and progress.
Whether for trading or any other investment: Never invest more than you can afford to lose entirely. This rule seems obvious, but it's rarely respected by beginners.
How to determine your appropriate investment amount :
To define your starting capital, apply the "3 circles" rule: start by assessing your overall financial situation by separating your essential needs (rent, food, transport), your security savings (6 months' running costs) and finally your available savings.
Your invested capital should only come from this last category - money you don't need. In concrete terms, if losing this amount doesn't change your lifestyle, your plans or your financial security, then it's an appropriate amount.
The classic beginner's mistake is to want to "do well" by investing a "serious" amount that actually puts them under psychological pressure. It's better to start small and gradually increase once you've mastered risk management. Your initial goal is not to become rich, but to learn without financial stress.
Think about your profile too: a student will naturally have more modest capital than an established professional, and that's perfectly normal. The important thing is the ratio to your means, not the absolute amount.
- Borrowing to trade : Never, ever, ever!
- Using precautionary savings: Keep your capital safe
- Rent/food money: Trading is not a guaranteed income
- Family pressures: Don't trade with your family's money
Each order type has a specific role that can be used depending on the context and integrated into your trading strategy.
Use this type of market execution when you want to buy or sell a currency pair immediately at the price currently displayed on the market. The transaction is executed in real time. You must, however, take into account the spread and volatility of the moment, which can vary the final price by a few percent. PIPS.
You can schedule a Limit order when you want to buy or sell at a "better" price, for example in the event of a technical correction or pullback/throwback. The market order is validated only if the price is reached, and is then triggered in the direction of the programmed buy or sell.
You can program a stop order when you want to buy at a specific price, such as when support/resistance is breached. The market order is triggered only if the price is breached.
The stop loss is the most important tool for your financial security. It's an automatic order that closes your position if the price goes against you.
How a stop loss works :
You buy EUR/USD at 1.1000
You place a stop loss at 1.0950 (50 pips risk)
If the price drops to 1.0950, your position is automatically closed.
You lose exactly 50 pips, no more.
Why use a stop loss :
→ Limit potential losses to a predefined amount
→ Take the emotion out of the exit decision
→ Protect yourself even when you're not in front of your screen
→ Prevent catastrophic losses
Take profit is the opposite of stop loss: it automatically closes your profit position at a predefined level.
How to place your take profit
The take profit is not placed randomly, but according to your graphic analysis. Identify resistance levels, previous peaks or historical rejection zones to position your earnings target logically.
This technical approach to take profit allows you to target areas where the price has a good chance of reacting, rather than arbitrarily setting a number of pips. A well-placed take profit on a solid technical level is more likely to be achieved.
Validation by risk/return ratio :
Before validating your trade, always check that your risk/reward ratio is favorable. A minimum ratio of 1:2 (risking 1 to gain 2) is generally considered acceptable for maintaining long-term profitability.
This ratio allows you to be profitable even if you only have 40% winning trades. I'll tell you more about it in the rest of this free trading course.
From the chart of the currency pair you want to trade
Select "New order" from the main toolbar
In the window that opens :
Type: Choose Market Execution or BUY/SELL limit or BUY/SELL stop according to your analysis.
Volume: Determine the type and calculate the number of lots according to your % risk (we'll see the formula for calculating the size of a position in the next section).
Stop Loss: Specify the price at which your position should close negative.
Take Profit : Specify the price at which your position should close positive
Click on "Sell" or "Buy".
How to change an existing position on MT4
In the terminal, then in the "Trading" tab, select the position you wish to modify
Right-click on the position
Select "Modify or delete order".
Modify Stop Loss and Take Profit fields
Click on "Modify
Calculating position size correctly is crucial to reducing disproportionate and unforeseen risks of loss. Here's the formula for calculating position size
Position size = (Capital × % risk) ÷ (Stop loss distance in pips × Pip value)
Starting data :
- Total capital: €1,000
- Accepted risk: 1% (therefore €10)
- Traded pair: EUR/USD
- Entrance fee: $1,000
- Stop loss: 1.0950 (50 pips distance)
- Pip value (on EBU/USD) for a standard lot: 10$ ≈ 9€.
Calculation :
Amount to risk: €1,000 × 1% = €10
Distance stop loss: 50 pips
Pip value: €9 for a standard lot
Position size: €10 ÷ (50 × €9) = €10 ÷ €450 = 0.022 lot
Result: You need to trade 0.022 lots (i.e. a 2200€ position)
Online calculators :
- Investing.com: Section " Tools " → " Position calculator "
- Babypips.com: Position size calculator
The 1-2% maximum rule
For money management appropriate for any trader, beginner or experienced, you should never risk more than 1 to 2% of your total capital on a single position.
Example with a capital of €1,000:
- Risk at 1%: Maximum €10 per trade
- Risk at 2%: Maximum €20 per trade
- If you lose: You can make 50 to 100 mistakes before you lose everything.
Why is this rule so relevant?
→ Long-term survival: You can withstand a series of losses
→ Psychological management: Less stress on each trade
→ Peaceful learning: You can learn without financial pressure
→ Progressive growth: Your capital grows slowly but surely
The risk/return ratio determines whether your strategy can be profitable in the long term, even if you have fewer than 50% winning trades.
1:2 ratio configuration:
- You risk: €50 per trade (stop loss)
- Your target: €100 per trade (take profit)
- Ratio: 1:2
Mathematically :
- 10 trades: 6 losers (-€300) + 4 winners (+€400) = +€100 profit
- Even with only 40% of success, you're profitable!
First phase: Determine your stop loss within your fixed maximum risk percentage (1 to 2% max)
Second phase: Set your take profit according to your technical analysis
Third phase: Validates the trade if the ratio is respected. Does not take the trade if the ratio is below 1:1.5 and looks for opportunities with a better ratio.
Just these two money management strategies can guarantee the preservation of your invested capital and enable you to build it up little by little. The key is to have a good analysis + trading strategy to maintain a good success rate, and to work on your psychology (understanding your emotions and reactions) which can limit your financial results.
Leverage on the Forex allows you to control a position larger than your actual capital. It's like a temporary loan from your broker.
How to choose the right level of leverage :
The choice of leverage depends entirely on your experience, psychology and money management strategy. The higher the leverage, the greater the impact of each price movement - in both directions.
Low leverage not only reduces your potential gains, but also your risk-taking. Conversely, high leverage can quickly turn a small mistake into a financial catastrophe. The classic beginner's mistake is to choose the maximum leverage offered by their broker, thinking they're maximizing their profits.
The reality is that even professional traders often use moderate leverage. Why? Because they prioritize long-term capital preservation over quick short-term gains.
Always start with the most conservative leverage you can psychologically accept. You can always increase it gradually once you've mastered your money management and your results are consistent over several months.
Preliminary analysis :
- Validated technical analysis (trend, support/resistance)
- Checked economic calendar (no major news)
- Favourable market conditions (no extreme volatility)
Capital preservation calculations :
- % of determined risk (1-2% maximum)
- Identified stop-loss level (support/technical resistance)
- Identified take-profit level (minimum 1:2 ratio)
- Calculated position size (formula or calculator)
Final validation :
- Validated risk/return ratio (1:2)
- Sufficient available margin (no more than 50% used)
Order execution :
- Opens the graph of the selected pair
- Trace your support/resistance levels
- Identify your optimal entry point
Preliminary calculations :
- Determine the distance of your stop loss
- Calculates the appropriate position size
- Determine your take profit
Market performance :
- Right-click on the pair → "New order".
- Enter all calculated parameters
- Final check before validation
Post-order follow-up :
- Record the trade in your diary
- Don't change your levels on a whim
- Let the market decide (stop loss or take profit)
Special money management checklist
Download our checklist, which lists all the steps you need to take to place an order and ensure that your money management is respected.
Increasing size after loss:
- Why we do it: To recover quickly
- Consequence: Risk of ruining his trading account
- Solution: ALWAYS respect your % risk rating
Move your stop loss:
- Why we do it: "It's going to come back up".
- Consequence: much higher losses
- Solution: Stop loss = non-negotiable level
Close winning positions too early:
- Why we do it: Fear of losing profit
- Consequence: deteriorating risk/return ratio
- Solution: Respect your initial take profit
In the next chapter
Now that you've mastered capital protection, it's time for the final step: creating your own trading strategy. In the final chapter, you'll discover :
The program
Progression
Downloadable resource
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