Van Tharp Money Management

money managment

If you are trading the currency is likely to have heard of the art of money management in Forex, developed a financial pioneer Van Tharp. He is an internationally recognized innovative and influential figure in the management of the size of the positions.

Dr. Van Tharp's ideas are simple, like most elegant concepts. The basis of his technique is based on what he called "model risk equalization interest" or PRM. With PRM, the trader must determine your risk appetite. To this end, it sets the percentage of commercial capital, who are willing to risk in the emerging trade opportunities.

The refinement of the model risk equalization interest is that it is relevant to trade on the basis of any amount of capital. With PRM, you can trade even with as little as $ 100, even with millions of dollars. Thus, you can gradually increase the volume of trade, exposing them not arbitrary but fixed at risk.

Suppose that a trader has $ 100,000 in the account and is ready to risk 2% of its capital in the transaction, based on interest rate risk equalization model. He wants to open a position the EUR / USD 1.2690 with a stop loss at 1.2750. He considered that 1.2740 is a good level of resistance, and add 10 pips as the preferential space for the security of the transaction.

The technique of money management in Forex trader will calculate the PRM position size by dividing the number exposed to the risk of dollar on the amount of points stop loss. Consequently, he will risk $ 2,000 (100000x0,02), his risk for an item is $ 33.33 (2000 ÷ 60). If another trader decides to open a transaction on the same terms, with $ 1,000 in the account, he will be risking only 33 cents per pip. In the end, both traders will risk only 2% of total equity.

Technology Dr. Van Tharp identifies that traders often do not have enough self-discipline to determine its risks. Often he gives too much weight a specific transaction, taking on huge risks, and vice versa. And with the use of PRM trader develops the discipline of money management in Forex, adhering to a given risk appetite, regardless of the size of the account. So he learns to deal with a moderate risk for each transaction, increasing their chances of a balanced and stable growth of capital.