Forex Money Management
With a strong knowledge on how to read your forex chart, you are now ready to trade. However I will like to take this chance to talk about something known as the trade management. Without proper trade management, you will never be profitable as you will always find yourself being stopped out in the end.
This is the exact thing that I do whenever I am trading and I hope that you will put it to practice as well.
The most important thing in trade management is never to adjust your stop loss to put you to greater risk as well as cutting short your target profit. This will lead to you constantly trading with low risk reward ratio.
For example: You enter a SHORT trade and you see the price slowly moving toward your stop loss of 30 pips and you decide to shift the stop loss to 50 pips hoping that the market will eventually move in your favour.
Most of the time, you will find that the price will still stop you out at the 50 pips which means that you are now trading with more losses. As a trader, we have to accept the fact that we are in a wrong trade whenever the price moves to stop us out and not to shift the stop loss to incur bigger loss in the end.
This is a very common mistake made by new traders as they are unable to accept any loss in their trading. So I am going to share with you something that I usually do in my trading.
Whenever the price moves against my position, I will stick to my stop loss and if the price ultimately stops me out, I will accept it and look for another trade to occur.
If the price moves in my favour, I will slowly shift my stop loss to breakeven and eventually wait for the price to hit my target. In this case, even when the price reverses to stop me out, I am not losing a single pip and this is how I protect my capital.
The creation of a speculators’ wealth comes from how they manage.
Until you use a money management approach, you will be a two-bit speculator, making some money
here, losing some there, but never making a big score. The brass ring of commodity trading -will always be
out of your grasp as you sashay from one trade to another.
As a trader, it is very important for you to understand the importance of protecting your capital. To a professional trader, protecting his/her capital is more important than winning a trade. If you are planning to become a profitable trader one day, you must understand and apply this good trade
management skill to your trading.
Another approach to this money management system I want to show you is a more conservative/safe tweak that can be added, at the cost of some reward potential.
Instead of opening one trade order, you open two instead, both with the same stop loss and entry
prices. The only difference is you split the total amount of money you want to risk on the trade
between the two orders. So if you want to risk $200 on the trade, you set the two trades at $100 risk
each with your lot sizing.
On one of the trades, set your target for a risk/reward of 1:1
On the other trade, set the target as your original target price for the trade.
When the 1:1 target trade gets hit, you collect $100. This $100 now covers the risk on your second
trade which is still open. This makes the second trade a “free trade”, because if the second trade was to get stopped out, you would lose no money. First trade was +$100, second trade gets stopped out
-$100. The only way you can lose money with this tweak, is if the 1:1 trade does not hit target and
both trades get stopped out.
Collected article By
Mr Alex Michel from UK