Read this shocking 40 page FRWC Brutal Truth FREE Report that exposes everything about forex robots. Get these Forex Scalping plus Correlation Trading Cheatsheets FREE. Combining scalping with correlation trading can be highly powerful strategy. Download these cheatsheets. They are full of premium content. You have a limited amount of money for trading whether it is $1,000 or $1,000,000, once it’s gone, you are done with trading. The problem is that you can have a long string of losing trades before you hit a winner with your trading system.

The riskier you’re trading strategy, the more thought you need to give to your money management style. Otherwise, you can find yourself out of the market with a margin call in no time. Let’s say, you trade 100% of your account. You only need one losing trade to lose 100% of your account. Suppose, you divide your trading account into 10 equal parts. Now, you can have 10 losers before you are out of the market.

Now, if you divide your account into 100 equal parts, you need 100 losing trades to call it a day as a trader. This is idea behind the famous Kelly Criterion. You need to trade only a fraction of your trading account let’s say not more than 2% on each trade. You got the idea, good money management can keep you in the game so that eventually you start hitting winners.

So as long as there is some chance of losing your money, you don’t want to bet it all on one trade. But as long as there is some chance of making money, you want to give enough exposure to your winning trade to make a decent profit. So how do you figure it out?

So what you need is a good money management system that tells you the position size for each trade that you should bet. Kelly Criterion emerged from the work done on signal noise issues in 1950s in the famous Bell Labs. Very soon, the mathematicians who had developed this formula saw its’ application in gambling and trading and in no time this formula took off with the traders.

In order to calculate the percentage of your trading account to put at risk, you need to know the percentage of your expected winning trades, ratio of winning trades to the losing trades as well as the return from the winning trades. These ratios are unique to each trading system. Once you have them, you can calculate the percentage of your trading account that you can risk with that trading system; Kelly %age=W-{(1-W)/R}.

W is the percentage of winning trades that the system makes over time. R is the average gain of the winning trade over the average loss of the losing trade. Many traders divide this percentage by 2 to be on a more safe side.