Importance of money management
Money management is the most crucial factor that defines the general strategies of Forex trading’s incomes or loss. It is something that should always be cared because it is the crucial trading key. You should be smart in money management to make profits and minimize the loss.
The Basics of Money Management
Two elements that should be considered carefully by traders about money management are;
- The risk of account for every trade
- How big the risk to your account
Risk of Account
The risk to your money is starting as the trade opened. The loss and negative slippage could be higher than your account although you own a stop loss. Noticeably, if you have many trades open and seem to be profitable, they are also in offensive risk level. Similarly, if you have many trades open in the same currency to bet in one direction, the sudden risk can be acceptable. In this case, the great ideas to take are;
- Defining the open trades’ maximum size that can be had in the same time
- Repeating it yet in every currency.
The Risk Management in Forex
To size the forex trader strategies, there are some variables to have. Firstly, calculate the risk in every trade in the total account equity percentage. It can be looked in the sums of cash in your account realized. Think about the worst possibility like the lost of every trade. The advantages of this method are;
- Winning and losing streaks are produced more by the forex trading strategies and not the result distribution. The equity percentage using in defining the trade size will risk less in losing and more in winning. So it optimizes the winning streaks and the losing streaks are minimized.
- Your account will never be wiped completely.
To determine the risk in every trade, some crucial points below should be considered;
- The worst performance you might suffer
- How many times the trade becomes factor
- The predictable percentage of winning and losing.
- The possibility of your account to trade small.
- Is your account a small one for real risk capital amount.
Stop Loss and Position Sizing
You should not defining the stop loss as the minimum amount you can reach. Find another broker or improve your account size if you have enough capital to risk. Yet, it is reasonable to define the stop losses by an averaged volatility measurement, and in trading trend that can become great management strategy. For example, utilizing numbers of 20 day regular true range to define the stop. Then, positioning the size base as the current account equity percentage, it is a commonly component in money management in the strategies of Forex trading.
Although the stop loss is based on the technical levels, it is still crucial to use volatility measurement in position sizing. For example, if the true range of 20 day average is twofold in a long term true range in average, the risk might be half of a standard risk in every pip based on the account equity.