Forex Money Management.

Trade safe building stable gains

Money management is a way traders control their money flow: in or out of pockets... Yes, it's simply the knowledge and skills on managing a personal Forex account. There are several rules of good money management: 1. Risk only small percentage of total account Why is it so important? The main idea of the whole trading process is to survive! Survival first, and only then making money on top. One should clearly understand, that Big traders first of all are skillful survivors. In addition, they usually have deep pockets, which means that under unfavorable conditions they are financially able to sustain big losses and continue trading. For the ordinary traders, the majority of us, the skills of surviving become a vital "must know" platform to keep trading accounts alive and, of course, to make good stable profits. Let's take a look at the example that shows a difference between risking small percentage of capital and risking a bigger one. In the worst case scenario of ten losing trades in a row the balance of trader's account will suffer this much: Risking 2% of total account per trade 100 98 96 94 92 90 89 87 85 Risking 10% of total account per trade 500 450 405 364 328 295 265 239 215

Trades

Account balance Start 5000 4900 4802 4706 4612 4520 4430 4341 4254

Trades

Account balance Start 5000 4500 4050 3645 3281 2953 2658 2392 2153

1 2 3 4 5 6 7 8 9 10

1 2 3 4 5 6 7 8 9 10

4169 17% of account has been lost

1938 over 60% of account has been lost

Apparently, there is a big difference between risking 2% and 10% of total account per trade. A trader who has made 10 trades risking only 2% of balance per trade, under the worst conditions would lose only 17% of total account. The same trader who had been exposing 10% of balance per trade would end up with loss of over 60% of the total account balance.

2. Rebuilding of a shrinking account is harder that it may seem to be

Let's take a look at calculations where a trader has lost some part of his account. How much effort will it take to recover the original account balance? Account $ 5000 $ 5000 $ 5000 % of account lost 25% 50% 75% New balance $ 3750 $ 2500 $ 1250 Need to make 35% of new balance ($ 1250) to cover losses 100% of new balance ($ 2500) to cover losses 300% of new balance ($ 3750) to cover losses

Note that it's only to cover losses: Who is going to make money then..? And when? Now, there is a challenge: try on your demo account to rise up 300% or at least 100% of your original account trading as it would be real money. Will that be easy? I don't think so. Can you prove me wrong?

3. Calculate risk / reward ratio before entering a trade

When chances to win in a trade are smaller than potential losses, don't trade! Remember staying aside is a position. For example: 40 pips to lose versus 30 pips to win, 20 pips to lose versus 20 pips to win all that is a clear sign of bad risk management. Before entering each trade, reassure that risk / reward ratio is at least 1:3, which means that chances to lose are tree times less than promises to win. For example: 30 pips of possible loss versus 100 pips of potential win is a good trade to consider entering. Adopting this rule as a must, in the long run will dramatically increase trader's chances to succeed in making stable gains.

Next chart shows the "risk / reward" rule in practice. Ten trades based on 1:3 risk / reward ratio were conducted. A trader was losing only $ 100 in each trade when he was wrong, but won $ 300 in each profitable trade. Trades 1 2 3 4 5 6 7 8 9 10 Total Grand Total -100 -100 - $500 + $1500 -100 +300 +300 -100 -100 +300 +300 Lost trades Winning trades +300

+ $1000 in profit

As we can see, constantly using 1:3 risk / reward ratio and being successful only 50% of the time, trader will still make a profit. The higher the reward ratio (compared to risk ratio) the better are chances to end up in profit.

4. Learn to use protective stops

All about protective stops read on Learn to use Stop Loss effectively Complementary tips to money management in Forex: A. Never add to a losing trade. A losing trade only means that decision taken was actually wrong. Market won't suddenly turn just to save unsuccessful traders, but instead will beat them more! Losing trade? Then cut your losses short and never add up new positions to a losing trade!

B. When odds to win are high, try running two or more positions at the same time in order to have more freedom in taking some partial profits and let other profitable trades run. Such strategy saves lots of nerves, gives more room to maneuver and eventually brings higher profits. Good trades!