Money ManagementTrading Forex is all about defending what you and taking your losses and keeping them small. Forex is a game of probabilities not certainties and you are going to have them so you need to be prepared to mange them. Just like the successful football team knows that if its defence is strong, its offence will get opportunities – the successful Forex trader knows his time will come too. He has leverage on his side but it can be a disadvantage as well as an advantage.
Before we give you some money management tips lets make one point clear over leveraging of accounts destroys more traders than any single reason. Your broker may give you 200:1 leverage but you should use it all. Leverage creates two problems:
- It increases volatility
- It gives a leveraged transaction impact on your account 2 pips might look small on un leveraged cash but its impact is huge on account size when you use 200:1 leverage and you need to cover this amount which can very often be in double figures in relation to account equity , before you breakeven.
Lets look at how important it is to keep your equity intact and not fall to far behind with a simple example.
Amount of Equity Lost % Gain Need to Return Original Equity Value25% 33%
A trader would on the above figures have to earn 100% on capital, just to break even on an account with a 50% drawdown. At 75% drawdown, the trader must make 400% just to bring it back to its original value.
Understanding Standard Deviation and its ImportanceUnderstanding the concept of standard deviation of price is essential if you want to win at Forex trading yet, very few traders have even heard of it, let alone understand It but it should be a vital part of any Forex traders education.
Standard deviation simply tells you the volatility of the market you are trading and you have to make sure, your stop is close enough to protect your equity but far enough away, that you don’t get stopped out by random price moves to soon. This is a delicate balancing act but one which is essential for Forex trading success.
Money Management TipsMake sure you expect the worst first and then things can only get better! As soon as you have money in the market, you create risk and ANY trade has the potential to go wrong, no matter how good it looks to you.
Use these tips to help you preserve equity
- Place stops as Soon as you enter a trade don’t Use mental stops you will be tempted to run losses.
- Make sure you do not trail stops too closely in random volatility. A common error is to move a stop to close and then get bumped out the trade early! If you are trend following you need to use a wide stop so you don’t get stopped out to soon and you must accept short term drawdown into open equity to bank a longer term profit.
- If you make a lot of money in a short period of time (more than 10% of your account size) consider banking it or take partial profits.
- Always look at your overall equity in your account and take this into consideration when managing your trades – above all else protect your core equity.
Think of Losses as Your Overhead!Forex trading is a business and losses are your overhead - so don’t take them personally. A business will have an overhead which costs money – stock, staff, rent etc and the overhead of a Forex business is trading losses. Don’t worry about taking them, you have to and losing and keeping losses small, is the key to long term Forex trading success.
As the old saying goes “if you mind the pennies the pounds will look after themselves” in Forex trading this can be translated to “if you mind the losses the profits will take care of themselves”
All successful Forex trading strategies are based on strong money management and yours must be too.