The internet offers several methods, but fundamentally, it should look like this as an example.
I have 50K trading account.
Every trade, I should only risk x% of my trading account size.
Every trade, I should aim to get 2-3x% of my trading account size.
For me, the x value is 2%.
Thus SL = 2% and TP = 4-6%.
When I buy a counter, for example, AP Oil which I recently posted. My entry price is $0.26, SL is $0.255, and TP1 is $0.285 TP2 is $0.295.
People can ask why my SL so close to entry, it depends on your methodology. For mine, it will turn bearish if it breaks my entry price.
So for this counter, how many lots should I buy?
Here's the calculation:
2% of 50K = $1000. It means I can afford to lose 1K per trade.
Now use this 1K to divide by difference between entry and SL = $0.26 - $0.255 = $0.005
I can buy up to 200 lots. BUT I only have 50k, how can I buy 200 lots (which is 52k). So I can do 2 things: 1) Adjust my 2% to 1%. 2) Increase my SL to say $0.25 by using another indicator.
This is prudent money management. Why?
Out of 10 trades, I dont need to win all 10 to have an overall profit. I dont even need 50% hit rate.
All I need is 3 wins to gain profit. (6% x 3 = 18%, 2% x 7 = 14%)
And if you use your methodology properly, 3 wins out of 10 is really quite average.
I can adjust my TP accordingly according to macro market sentiment, but at least I know if this counter goes bullish, one mouth can clear all my losses at 2%. TP1 can breakeven my 5 losing trading counters.
So that's why I say in my previous post on SBI and discipline, it is really OK to lose. You just need to have a good chart, a good method of discerning the chart, a good discipline, and a good plan.
Some people outside charge 3k to 8k teaching such basic stuff, because that's how they take money from junior traders. I learnt it the hard way from the market as my teacher, so take this and apply to your trading as you deem fit. You may copy somewhere or share, it is free. And hopefully your trading journey can become better. Let's all learn and huat together!