Money management in Forex is a common concern of majority of the Forex traders around the globe. There are so many aspects of money management in Forex that every trader should know. Today, I am going to discuss something that nobody will tell you ever about money management in Forex trading.
Money management (money management) is usually the most important “factor x” that determines the profit or loss in Forex trading strategies. This fact is overlooked so often that must be repeated over and over again. It is one of the key business essentials. Money management itself will not give a margin of victory He needs a good trade entry and exit strategies for effective that- However, without intelligent fund management practices, a profit margin may not see its potential benefits, and the risk of producing a total loss is even running.
Money Management in Forex
There are two elements in the money management Forex traders should consider carefully: How much of your account you risk per trade and the percentage of your account that should always be at risk, as a whole or by some kind of sector. There are no absolute answers to these questions, the best for you will depend largely on their own risk appetite and tolerance for losses, temporarily or permanently.
Money Management in Forex: Risks in your account
Every time you open a trade is risking money. Even if you have a stop-loss, it could have a negative slip and lose more than you planned. Obviously, if you have a large number of open trades at the same time, even if they all make sense individually, they may together constitute an unacceptable level of risk. Similarly, if you have a lot of open trades that bet all to the same currency and in the same direction, you risk a sudden beyond acceptable loss.
For example, you may determine that you will never have more than 2% the size of your account at risk in open, or 1.5% trading at risk in a single currency. You should also be careful when dealing with currencies that are linked to another currency by their respective central banks. For example, someone who was short the Swiss franc in January even using a relatively small amount of leverage of 4: 1 have probably had their account deleted, regardless of any stop loss, since the movement was dramatic.
To a lesser extent, if you are trading currencies or other instruments that have high positive correlations, it may also have set a limit on total open trades that are strongly correlated. This becomes more important if you are trading beyond the Forex, for example, oil and the Canadian dollar have a high positive correlation.
The exact amount of maximum risk you should take depends on you, but be aware that once your account has been reduced by 25%, it is necessary to increase by 33% just to get back to the starting point. The lower reaches worse it gets: a loss of 50% requires an increase of 100% !.
Forex Risk Management – What is your risk per trade?
Now that you have some risk limits established for your account in general and by currency, you must address a different question as to how much you should risk per trade. Of course, it is well to risk different amounts per transaction, but this should be determined systematically.
There are several variables that must be analyzed to determine the size of the position in Forex strategies, but all risk trading must be calculated as a percentage of its total capital. The total capital account can be determined by observing the amount of cash earned on your account -must assume the worst case scenario, ie that each result in losses-open trading .
There are two advantages in this method instead of simply putting at risk the same amount again and again regardless of performance, which is the case when a fixed lot size or a fixed cash amount is used:
Forex strategies tend to produce both profit or loss and nonuniform distribution of results. Using a percentage of capital to determine the size of each trading means that you risk less when you are losing and more when you are winning, which tends to maximize winning streaks and slumps minimize.
You can never completely remove your account! Using a fixed lot size or amount of cash could end up with your account, or at least cause a decline which can never be recovered.
Element of Money Management in Forex
These are some of the essential elements that must be considered in determining the amount you should risk per trade:
- What would be the worst performance you may have and what look like? You could cope psychologically to a reduction of 10%, 20%, or even worse? Should I go so far in negative territory?
- The frequency with which you trade will also be a factor, as this will have an impact on their maximum fall.
- What are your percentages provided profit and loss? Retest your trading. For example, if you have a Forex trading strategy where you plan to lose 80% of their trading , but winning 10 times the risk in the remaining 20%, your risk per trade should be less than if you were planning to do 3 times your risk 40% of its operations. Of course, if you have a flexible output strategy, then just make an approximation of how it will probably be time.
- Is it possible to trade your account size as small as possible? For example, if you have an account of only $ 100, and you want to risk 1% per transaction, you will have to risk a penny per pip with a stop loss of 100 pips. This may be impossible, depending on your broker. However, you should capitalize on upward or change its business strategy rather than increase your risk per trade if that were the case.
- Is your account a nest egg or a relatively small amount of capital at real risk? If your total assets are $ 25,000 for example, and you have a $ 10,000 account, you may have less tolerance to falls compared with an account of $ 1,000.
Remember that your money management strategy will interact with statistically profit rate and the average size of their profits to directly affect their losses or gains over time.
Money Management in Forex: Stop Loss Position and Size
Never determine the stop loss based on the minimum you can afford. For example, if you want to risk no more than $ 20 per transaction, but the minimum size of the position that your broker allows you is $ 1 per pip, then this is a very bad reason to use a stop loss of 20 pips and a size fixed lot of $ 1 per pip! You must find another broker or increase the size of your account if you have enough venture capital, or find a Forex trading strategy usually use a stop loss of 20 pips, if you feel comfortable with it.
However, it is legitimate to determine the stop loss by measuring the average volatility and especially in trading trend , this in itself can be a very powerful money management strategy.
Even if you base your stop loss at technical levels it may still be worthwhile to use a measure of volatility to determine the size of the position. For example, if the average range of 20 days is twice the range in a very long time, you may risk half the baseline risk per pip related to the capital account.
Further reading on this topic: Investopedia