In learning how to be a great trader, a well-defined Best forex trading course money management system is just as crucial as a strong forex trading strategy.
What exactly is Forex money management?
The processes that a forex trader will use to manage the funds in their forex trading account are referred to as forex money management.
Preserving trading capital is the key tenet of forex money management. That is not to say that you will never have a losing trade in forex because that is impossible. Forex money management aims to reduce trading losses to a ‘manageable’ level. That is, if a trade loses, it does not prevent the trader from winning other trades.
Money management is closely related to risk management because when trading, all risks and failures are associated with your money. However, the definitions differ slightly. Risk management is the process of anticipating and managing all identifiable risks, which can include something as insignificant as having a backup computer or internet connection. Money management for forex traders, on the other hand, is entirely concerned with how to use your money to grow your account balance without putting it at undue risk.
How do I stop losing money in the forex market?
This is the question that forex money management will assist in answering. Because we are all human beings with similar traits (both good and bad), there are some common mistakes to avoid when trading forex. Successful traders consider trading to be a business. Your forex trading business’s goal is to make money, not lose it, so precautions should be taken to avoid losing it.
Is it possible to lose all of your money in forex? Yes, you can lose all of your money in any investment that puts your money at risk. As an investor, it is your responsibility to reduce the likelihood of this happening.
There are techniques to fine-tune a trading strategy so that it wins more and loses less, but this is rarely the case. The main reason is that there are no specific money management rules to adhere to. So let’s go over those rules now.
The best forex money management guidelines to follow
If you follow these money management rules, your chances of success in forex trading will skyrocket.
1. Using position sizing to define risk per trade
The idea is that a trader should only put a small portion of their account at risk on any given trade. Trading mentors frequently preach the “2 percent rule,” which states that a trader should risk no more than 2% of their account on each trade.
Depending on recent trading performance, some traders will vary the size of each trade. The anti-martingale money management strategy, for example, halves the amount of the deal when there is a trading loss and doubles it when there is a trading gain.
A good trading strategy and risk management plan should help a trader make money over time, but you never know what will happen in the next trade, or even the next ten. To reduce the likelihood of the next trade being a loss, the forex trader should keep the trade size small in comparison to the size of the trading account.
2. Establish a maximum account drawdown for all trades.
What is a forex drawdown? A drawdown is the difference in account value between the highest the account has been in a given period and the account value after a series of losing trades. The greater the drawdown, the more difficult it is to restore the account balance with winning trades.
Traders will establish an acceptable maximum drawdown level based on their trading strategy back testing. For example, if a trader tries their technique over 50 transactions and has never encountered a drawdown more than 6%, the trader may establish a maximum drawdown of 6% or 7%. If all open trades drop the account by more than 7% while trading on a live account, the trader will have a money management rule in place to close some or all of the trades in order to restore the account to good standing.
3. Assign a risk-to-reward ratio to each trade.
Is a risk-reward ratio of 2:1 the best? The rule of thumb taught in trading textbooks is that a trader should aim for winning trades that are twice as large as losing trades on average. With this risk:reward ratio, the trader only needs to win one-third of his or her trades to break even.
In reality, the most important thing is to stick to the risk:reward ratios you’ve chosen. If a trader selects a risk:reward ratio of 1:1, the trader must win more deals (at least 6 out of 10) in order to be successful. If the trader selects a risk:reward ratio of 3:1, they must win fewer trades (1 out of every 4 trades) to break even.
4. Plan your trade exit using a stop loss and take profit order.
Using a stop loss order limits straight from the source amount a trader can lose in any one trade, whereas using a take profit order limits the amount the trader can win in any one trade. Using these forex signals order types, the trader can ensure that he or she is not unexpectedly in a position where he or she loses more money than anticipated.
Of course, there are some drawbacks to using stop losses, the most frustrating of which is seeing a stop loss trigger only to have the trade reverse and hit the take profit level. However, as annoying as that experience may be, it is worthwhile to keep a stop loss in place to avoid situations where the price does not turn around quickly; this results in an insurmountable loss on the account.