Forex money management is one of the most important things you can learn before you actually begin making live trades.
The money management principles discussed here will teach you how to avoid the costly mistakes many new traders make, often to the degree that they lose their entire investment on the first handful of trades.
Why do some forex traders fail while just a handful succeed?
Why do so many new and intermediate traders blow up their accounts (again and again?)
How can you prevent blowing out yours?
It's not the answer you likely want to hear.
The answer is not to have the best strategy. You should be well aware that there are many, many forex strategies that work well - technical strategies, trending strategies, price action strategies, scalping strategies, and even discretionary strategies and so on.
So why does one trader trade a strategy successfully and another trader trade the same exact strategy unsuccessfully?
The answer is this: The successful trader uses good money management.
Trade With Sufficient Captial
One of the worst blunders that forex traders can make is attempting to trade without sufficient capital.
The trader with limited capital not only will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but he will also frequently be taken out of the trading game before he can realize any sense of success trading the method(s) or patterns.
Discipline is probably one of the most overused words in forex trading education. However, despite the cliché, discipline continues to be the most important behaviour one can master to become a profitable trader.
Discipline is the ability to plan your work and work your plan.
It’s the ability to give your trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to trade the methods and patterns even after you’ve suffered losses. Do your best to cultivate the degree of discipline required to be a world-class trader.
Employ Risk-to-Reward Ratios
The following shows you possible risk-to reward ratios, and the win ratios required to break even in a trading system.
Risk-to-Reward Ratio (in pips)and Win Ratio Required to Break Even(%)
40/20 (2 to 1) = 67%, 40/40 (1 to1) = 50%, 40/60 (1 to 1.5) = 40%,
40/80 (1 to 2) = 33.5%,
60/20 (3 to 1) = 75%,
60/60 (1 to 1) = 50%,
60 /90 (1 to 1.5) = 40%,
60/120 (1 to 2) = 33.5%
When dealing with leverage, you must make it work for you and that means cutting your losses and running your profits. All the great football teams have great defense and they know if they don't concede points, there offense will get the chances to win the game and it's the same in Forex.
Lose 50% and you have to make 100%, just to break even and the moral is:
If you lose money, you have to work even harder to get it back so let's look at how to keep your equity intact.
1. All Trades are Equal in terms of Risk
Never make the mistake of calculating your target minus your stop as your risk reward! This is just an opinion and in terms of money management always assume the worst and things can only get better. All trades are the same in there potential to lose money.
On risk per trade you will hear a lot of people tell you that you should only risk 2% but on small account you need to risk more so do 5 - 10% and also don't diversify, do one trade at a time.
2. Trade Breakouts
Breakout trading, means buying new breaks to chart highs and lows all trades start and continue from these breaks, good breakouts offer the best risk to reward in Forex trading. Your stop, is simply behind the breakout point, so it's tight and on the best breakouts, you see huge moves so you have great risk to reward.
3. Place Stops Outside of Random Volatility
A key mistake by many traders is to place there stops inside random volatility and day traders do it and lose. Why do they lose? Because all volatility in daily time frames is random so you may as well flip a coin. Focus on the bigger trends and bigger profits so your stop can be further away but the odds of a triple digit gain are higher.
To make money you need to give the market room to breathe so don't try and restrict risk so much you create it - its no point in having a stop close, if its odds on to be hit.
4. Do a 50 - 50
This is my favourite money management trick. We all know the big trends last for weeks, months or years but it's very hard to sit on a long term trend as they always recoil back into open equity profit and eat it. Try this, as soon as the market moves to over bought in a bull trend bank 50% and leave 50% in the market. Then wait for the next breakout or pullback to support, to put the other 50% back in and keep doing it.
This keeps you in the trend and if you do it correctly, you can milk the trend for more money and cushion your core equity at the same time.
Confused? Find it difficult, but still want to get in on Forex and make money? Then let a computer software package do _ALL the trading for you!
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