Forex Chennai Training,Free Forex Trading Courses Online,Trade Currency Online,Forex Free Live Signals,Forex Market Brokers
Traders tend to focus so much on trade entry strategies, thinking that this is the key to success. In fact, not only are trade entries less important than trade exits, both are less crucial to success than good money management. Unfortunately money management strategy tends to be overlooked. It is vital that your money management strategy is a good one, otherwise successful trading will be very hard to achieve. Fortunately, it is not a very difficult area to master.
“Money management” just means how much money you risk on a particular trade. Even if you are making trades without having predefined stop losses, you will still be risking a certain amount per pip, which is where your money management strategy is applied. So your money management strategy is how you decide how much to risk on a particular trade.
Why Money Management Strategies are Important
The main reasons why money management strategies are so important are:
1. If you keep risking the same amount on every trade, and do not adjust for your losses, you might eventually either lose all of your money, or lose so much of it that it becomes very hard to recover (more about this in the table below).
2. It is important to have a system that determines how much you risk on each trade to keep things proportionate, otherwise you can lose too much on the losers and not enough on the winners to benefit from successful trade entries and exits.
A common mistake is to forget that when you lose money, you have to make more (proportionately) to get back to where you started than you lost.
This can be hard to understand, so here is an example:
You start with $100. You lose $20. You have lost 20% of your money.
You now have $80. To get back to where you started, you need to make a profit of $20. But wait! $20 is not 20% of $80, it is 25%. So you need to make more than you lost.
The table below illustrates how much you have to make, proportionately, to make up losses:
Loss of Capital
Profit Required to Make Up Loss
Forex Money Management Strategies
There are three main money management strategies. Let’s review each of them.
Risking a Fixed Amount per Pip/Trade
This is a very simple strategy, but it is extremely flawed for the reasons that we already outlined.
Risking a Fixed Proportion of Equity per Pip/Trade
This is a better strategy. It has two major advantages:
1. Winning streaks result in exponential multiplication of winnings, whereas during losing
2. streaks, you lose less and less on each trade.
3. You can never completely wipe out your account.
This strategy can be made even stronger in two ways.
First of all, you do not have to size your risk the same on every trade. For example, you might have “A” grade trades that you feel really confident about, then “B” grade trades that you want to take but feel less confident about. You could risk more on the “A” grade trades. This can be a useful psychological tool to help you overcome any fear of losing trades that you are suffering, but it should be used carefully.
Secondly, you can adjust risk for volatility, by using the Average True Range indicator. For example, you might decide that you will risk 1% of your equity for 3 times the average true range of the last 20 days. This will ensure that your winnings and losses should not fluctuate too dramatically as market volatility changes. This has the effect of smoothing out your equity curve, which is important, because it will improve the overall compounding effect on your account. This compounding effect is a major factor in long-term profitability and is often overlooked.
Forex Money Management Spreadsheet
You can keep track of your money management most easily by keeping a spreadsheet of your trades, showing your total equity after each trade. Using formulas can show you quickly how much you should be risking on your next trade.
Forex Martingale Money Management Strategy
This article would not be complete without a quick explanation of the Martingale Strategy. Very simply, this strategy tells you to keep doubling your risk after every loss, until you eventually make back all your losses. There are variations of the strategy where you risk even more than double your previous risk.
This strategy should be avoided at all costs, as it is the easiest and surest way to completely wipe out your account. If you start by risking 1% of your account, you will wipe out your account as soon as you encounter a losing streak of seven consecutive losing trades. You will certainly have a losing streak of seven consecutive trades. It is certain to happen. The Martingale Money Management Strategy is only guaranteed to work for someone who has all the money in the world. If you had all the money in the world, why would you be trading?
Tags:Forex Chennai Training,Free Forex Trading Courses Online,Trade Currency Online,Forex Free Live Signals,Forex Market Brokers
Hi! I'm Tamil.
Here at Forex Tamil, we are focused on teaching you high probability and low risk price action trade setups, so that you are able to create a consistent edge over the market that you can use to your advantage, time and time again. You Can Read More Here.
LEGAL : This website, presented by Forextamil.com, the lessons and articles it distributes and the blogs it publishes make no recommendations about what Commodity , Equity Future,Forex or Currency to buy or sell. All information is strictly educational and/or opinion. Forextamil.com does not provide financial, legal or trading advice and is not soliciting the buying or selling of Commodity ,Equity or Currency. The user acknowledges that Forextamil.com is in no way responsible for the investment and trading and/or legal decisions of its users. The user acknowledges and accepts that Forextamil.com assumes no responsibility for inaccurate, erroneous or unavailable data. The user is encouraged to conduct its own due diligence. Any tips or trade setups represented are simply Forextamil.com opinion and meant to pass on information about the Commodity, Equity,Forex or Currency markets and do not constitute financial or trading advice. By using the information, you acknowledge that Forextamil.com is not providing financial or trading advice and agree that Forextamil.com is in no way responsible for your trading and investment decisions, regardless of whether those decisions were inspired by using this site and/or its news letters or not.
Disclaimer : Any Advice or information on this website is General Advice Only - It does not take into account your personal circumstances, please do not trade or invest based solely on this information. By Viewing any material or using the information within this site you agree that this is general education material and you will not hold any person or entity responsible for loss or damages resulting from the content or general advice provided here by Forextamil.com, its employees, directors or fellow members.Commodities, Equity Futures, options, Forex and currency trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the Equity futures , Commodity Forex and Currency markets. Don't trade with money you can't afford to lose. This website is neither a solicitation nor an offer to Buy/Sell Equity futures, Commodities, Currency or options or other financial products. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in any material on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.
HIGH RISK WARNING : Commodities. Equity Futures, Forex,Currency and Options trading has large potential rewards, but also large potential risks. The high degree of leverage can work against you as well as for you. You must be aware of the risks of investing in Commodities, Equity futures, Forex ,Currency and options and be willing to accept them in order to trade in these markets. Commodity, Equity Forex and Currency trading involves substantial risk of loss and is not suitable for all investors. Please do not trade with borrowed money or money you cannot afford to lose. Any opinions, news, research, analysis, prices, or other information contained on this website is provided as general market commentary and does not constitute investment advice. We will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. Please remember that the past performance of any trading system or methodology is not necessarily indicative of future results.