Most people who start out in forex trade focus their entire attention on learning a good forex strategy, method or system. Most of them think that if they are able to make profitable trades, they will become profitable traders and eventually make a living trading Forex… Most traders are dead wrong!
A forex strategy, method or system is just a tool to determine when a price or market conditions present a good investment opportunity. The way we handle money determines whether we get rich or go broke when we trade these opportunities.
So, as you can see, having a good forex money management system is extremely important.
But what exactly is money management?
Money management can be a strategy or system for moving money from one place to another in order to minimize losses and maximize profits.
Many people think that defining their risk to 2-3% per trade and calculating the distance for the stop loss and pip value in each trade is money management…
And yes, that’s an important part of a money management strategy, but there’s a lot more to it than that…
So how can we properly manage money?
In this article we will discuss some forex money management strategies
1) The broker:
This is the first step you should consider in managing money in Forex.
Most retailers can afford to invest 1-5,000 in their store, some even less than 1,000. Although high leverage gives us the ability to buy/sell large amounts of money with a small margin deposit, not every broker allows micro accounts where a trader could buy 1,000 lots instead of the mini 10,000 and standard 100,000 lots.
Some brokers even support many 100’s of base currency, very few like Oanda allow you to buy single units.
Micro accounts are better because they allow traders to spread risk fairly and avoid the asymmetric leverage that is fatally dangerous for traders.
Watch this video for more information on the difference between using micro and standard accounts with less than 10,000 accounts and the dangers of asymmetric leverage: http://www.youtube.com/user/TheProTraders#p/a/u/0/V6aCmCCRdvQ
Forex Money Management Strategies:
1) Fixed $ amount in drawdowns:
This money management strategy is helpful for quickly recovering from losses. The trader trades a percentage of the account on success, but trades a fixed amount when an unsuccessful trade occurs:
$10,000 2% Risk = $200 RR= 2:1 RETURN= $400
$10,400 2% Risk = $208 RR= 2:1 REWARD= $416
$10,816 2% Risk = $216 RR= 2:1 LOSS= $216
$10,600 FIX A= $216 RR= 2:1 LOSS= $216
$10,384 FIX A= $216 RR= 2:1 WIN= $432
$10,816 2% Risk = $216 RR= 2:1 REWARD= $432
$11,248 2% risk = $224 and so on…
You only need one trade to fully recover from two losses.
Compounding is a very powerful long-term money management strategy. Basically, the profits from each successful trade are reinvested and avoid making withdrawals over a relatively long period of time will boost your account like you never imagined!
3) Separate capital letters
This concept allows for a more aggressive trading approach.
The trader divided his total trading capital into two parts, one for risk and one for safety.
The risk account is the 5% of the total trading capital, the remaining 95% is in a separate secure account. The trader only trades with the risk account (5% of the total trading capital) but risks 15-20% of the risk account. Every time he doubles the account, he recalculates the 5% of the total invested capital and splits the money equally between the two accounts.
Implementing any of these forex money management strategies or mixing a few of them will allow you to maximize profits and minimize losses in the best possible way.
Thanks to Nathan R Murphy | #Implement #Good #Forex #Money #Management #Strategies
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