Money Management in Forex Trading

February 18, 2017
forex trading
 Money Management - The money management strategy is very personalized, since it is designed and executed to meet individual requirements of a trader. This strategy varies from one trader to another, because every trader has a different goal, different risk tolerance level, and different amount of capital. Therefore, there is no universal advice to formulate this strategy.

Forex money management have several different aspects and stages and should be started from the very first stages of your live forex trading business which is opening your live trading account. We have a very simple rule that says “Never risk more than 2% of your money.” Most traders think that this rule should only be applied after having a live trading account and while they trade, but this is not true. This rule should be considered even when you want to open your live account. Lets say you have already practiced and demo traded enough and you feel confident enough to open your live account. And lets say you have a $20,000 saving. Would you open a $20,000 live account? Well, you can do that but what if you lose this money for any reason? For example your broker becomes bankrupt and closes the company and never pays your money back. Or you take a 20 lots position by mistake and you forget to set the stop loss. It goes against you for 100 pips and wipes out your account. You will not be able to start over, at least for a long time that you save some money. And this initial failure may have a bad impact on you and you may not think about forex trading anymore and you will lose the opportunity for good.

However, following are some tips that can be used by binary options traders to select a reasonable money management strategy that will be useful for them to make profitable trades:

Control the Risk and Achieve Consistency

A trader must be careful in formulating the money management strategy to increase returns. The successful binary options traders with long term plans do not seek to increase their return. Instead, they strive to control the risk, and achieve consistency over a longer period of time. They try to find the techniques that will help them attain consistent outcome with minimal drawdowns, even if it means earning small profits in the process. Therefore, a trader should control his risk, and achieve consistency first, and then accept the returns no matter how small they are.

Try to Achieve Break Even

In the past few years, most traders have adopted a strategy to risk a small portion of their profit. Money management strategy is also known as fixed fractional trading, as it decreases the dollar amount of risk when a trader suffers a loss, and increases the risk level when he earns profits. Therefore, a trader must strive to achieve a breakeven with a proper money management strategy. When traders use this strategy to risk a small portion of their profit, they turn their trading system into a loser. But if their approach involves risking a fixed dollar amount on every trade they place, it will not only improve the system's performance, but will also allow them to hit the break even, and improve profits.

Setting a proper stop loss for each trade, is a different story. Some traders always consider a constant number of pips for their stop loss positions but this is not correct. Stop loss value can be different from time frame to time frame, currency pair to current pair and trade setup to trade setup. Stop loss that I choose for a position which is taken based on a trade setup on daily chart, has to be much bigger than the stop loss I have, when I trade using a 15min chart. Accordingly the stop loss I have when I trade EUR-GBP is different than the stop loss I set for GBP-JPY.

Although, the account balance may grow at a slower pace with this approach, but it is better to keep on increasing the value of your money than to expose it to risk. This way, a trader will be relieved and stress free by reducing his bet size, in case he faces a series of losses.

A trader must always develop a sound trading plan when placing their money in the binary options market, because it is the real money they are trading with. Therefore, they have to adopt reasonable strategies and approaches to trade successfully in the market. Being a trader, if you manage to keep a portion of your profit aside every time you trade, it will improve the overall value of your investment, and boost your confidence.
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