Saturday 18 February 2012

Forex Money Management

What does a stop loss, limit, profit target, spread, margin, have in common? They are all related to money management, these are systems which are put in place to make sure I make money and try not give it back to the market. The course material goes into detail explaining the above terms in how and when to use them.

The main function of money management is to help  me manage my emotions. It seems that I need to take a logical approach in my decision making knowing that every trade setup taken there is a calculated risk. By doing that I have now taken an unknown variable and replaced it with some certainty, which can help me remove the emotional side to trading. The course states that many begging traders are largely unaware of some or most of the basic concepts of effective Forex money management, and this is a major reason why so many traders fail to make money over the long-term in the markets. 

How much should I risk on a trade?
The question should be how much money do I have as disposable income that I can realistically afford to lose? This approach does seem to be subjective, but through the course they have supplied me with a few tools to help me gauge how large or small my position size should be, and it also helps me calculate how much money I potentially could loose. I also learned that I should never risk any money in the markets that is not truly disposable, doing this will start me on an “even” emotional playing field, because I will have no emotional attachment to my trading money.

Risk Reward
It seems that proper implementation of risk reward is how professional traders make money, but many traders take the wrong approach to risk reward by worrying first about the potential reward and last about the potential risk. I need to first calculate the risk involved in any potential trade setup AFTER I've determine the most logical place to put my stop loss. Once I've done this, I then can determine what the potential reward is.e.g. If I risked £100 on a trade, I ideally want to aim for a reward of at least £200 or more; the R:R would be 1:2. The idea is that if I can make at least 2 times my risk on all my winning trades, I will, over a series of trades, offset my losers to the point of turning a decent profit.

Position sizing
Position sizing allows me to risk the same amount of money no matter what trading strategy I trade or how large or small my stop loss distance is. Having a wider stop loss on a trade doesn't mean I'm risking more money or that by having a smaller stop loss on a trade I'm risking less money, therefore I can adjust my position size up or down to meet the necessary stop loss distance. Once again logical place to start is with my stop loss on a trade setup, after I've figuring out where to place my stop loss, I THEN calculate the number of lots I can trade to maintain my pre-determined risk amount. Thankfully once again Forex Training Worldwide has supplied me with tools to easily work this out.

If I don't logically manage my risk on every single trade it will be impossible for me to manage my emotions. The better I manage my risk and money in the Forex markets with a trading strategy, the easier it becomes to manage my emotions, if I know exactly how much I can lose, and exactly how much I can make on every single time I enter a trade I'm unlikely to become emotional.

Keep you posted Happy pipping!!




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