Forex money management tips
Money management Forex refers to a set of rules that help you maximise your profits, minimise your losses and grow your trading account. While it’s pretty easy to understand the benefits of these techniques, it happens that beginners to Forex trading tend to neglect even basic money management rules and end up blowing their accounts. Analysing the market and determining whether to go long or short may be difficult enough for beginner traders, which is why I fully understand that thinking about managing your money and risk could seem boring at first.
However, without proper money management you can’t become a profitable trader. Full stop. Let’s take two traders for example – the first trader has an awesome trading strategy that is profitable 90% of the time, but doesn’t manage their risk at all. The second trader has an average trading strategy with a 50% winning rate, but utilises top-notch money management rules. What do you think, which trader will end with more profits by the end of the month? The answer is the second the trader, as the first trader will likely lose all of their profits (and perhaps even more) on a single losing trade. This is why a Forex money management plan helps a lot to succeed in trading.
Enough talking, let’s take a look at some of the most important rules of money management trading Forex.
The following list is not all inclusive and there are many more rules that can be used to manage your trades and money. However, in my experience, these tend to work the best as they directly focus on the most important point – minimising your losses.
Don’t chase the market
Cut the losses short and let the profits run
Be cautious when trading on leverage A common mistake among beginners is trading on too much leverage. Leverage is a double-edged sword – it can magnify your profits, as well as your losses. It may be tempting to trade on large leverage and double your trading account every week, but unfortunately this is not how trading works. The main principle that traders need to understand is that capital protection is always first. When opening a trade, think first about the downside risks and how much you could potentially lose, and only then think about the potential profits. The ideal leverage ratio is determined by a number of factors: your risk-per-trade, your typical stop-loss distance, and your trading account size. We’ll cover those in the following points.
Risk-per-trade refers to the maximum amount of risk you’re taking per any single trade. Risk-per-trade is usually determined as a percentage of your trading account size. Let’s say that you have a $10,000 account. If you open a trade with a potential loss of $2,000 (the maximum loss if the trade hits your stop-loss), then your risk-per-trade would be equal to 20%. This example shows how not to trade. Taking a 20% risk-per-trade is way too much risk, as a strike of five losing trades would wipe out your entire account! Even two losing trades would leave you with only 60% of your initial trading account size, and guess what – it takes much more than 40% to return to your initial account size of $10,000. The following table shows how much you need to make to return to your initial account after a series of losses.