Managing your money is probably the most important aspect of Forex. Without doing it properly you will generally find you will either break even most of the time on your account or you will even worse make bigger losses than wins. Because of this very reason it is so important to see money management as one of the major keys of trading.
So how do we manage our money effectively so that no matter what our account will grow over time. The overall best response is finding a strategy that works for you, my preference overall being price action and using confluence and then only taking trades that have at least a 2 to 1 risk reward. 1 being the risk and 2 being the reward. Even better are 3 to 1 or 4 to one or so on.
You get the point on this. Basically when we trade we do not want to be risking more than we can make on a trade. After that as long as your trading strategy has a win ratio of over 50% then your account will always win. In fact even if you win ratio is 40% you will still make more money than you lose by following this simple strategy.
So Why is this Strategy Overlooked?
Well, mainly because we as traders like to take profits too early. The best saying advise is this, never take profits too early. Instead let your winners run and your losers be cut out early. This can be done in two ways. Firstly set your stop loss and never adjust it to more than it is originally set. Instead see your stop loss as a thing that can only be adjusted into the profit zone. As an example, if say one of your trades reaches a good profit of say 50 plus pips, instead of taking profit straight away why not put your stop loss into the profit zone and lock in a certain amount of pips. That way if it happens to keep going to 100 plus pips you have more reward potential without having to worry about losing your trade.
My Basic Formula of MM in Forex
- When you trade is at least 50 pips in profit put your stop loss at 10 pips in profit and then come back later and see how the trade goes.
- If it moves to 100 pips in your favor then adjust it to 50 to 60 pips in the profit zone. This means that now you have locked in 50 to 60 pips and you have no risk, no risk what so ever and the trade may continue to go further in profit. That way you are letting your winner go and locking in profits as the trade moves in your favor. Eventually it will go against you and your stop will be hit but at least now you took as much from the market as possible. That is what i call good trading.
- If the trade goes against after you enter a trade do not under any circumstances change your stop loss to more risk.
- Do not risk more than 2% on any given trade. So that means if your account size in $2000 dollars then your maximum ( you want less ) stop loss on a single trade should be no more than $40. This means that if a trade needs 50 pips of risk to make sure that the risk is less than that amount.
Example trade above using Money Management, it allowed me to get over 200 pips so far on this trade. This is the AUD / NZD Dollar Daily Chart and a sell trade. Selling at 1.2963. Click image to enlarge.
Okay, so this is how it may look as an example of a good traders performance record with good management of around 50% win ratio.
Trade 1 + 50 pips profit
Trade 2 – 40 pips profit
Trade 3 + 100 pips profit
Trade 4 – 50 pips profit
Trade 5 + 10 pips profit( or commonly called just above break even. )
Total Pips Profit + 70 Pips Profit Overall
While that is not how it always goes, this just shows an average of what an average trading strategy can perform with good MM. If however you increase your win ratio by looking for more higher confluence trades then these numbers can get even higher to maybe 55% or even 60%. However with that all being said, you can still see that even with two losers and one just above break even this money management formula works fine and the account will steadily grow.
Okay so that is my basic rundown on MM in Forex. If you have any questions or comments feel free to leave some below.