How to Implement Good Forex Money Management Strategies
Most people who get started in the forex market focus their full attention on learning a good Forex strategy, method, or system. Most of them think that if they become able to make profitable trades, they will become profitable traders and end up trading Forex for a living… This is where most traders are completely wrong!
A Forex strategy, method or system is just an instrument to determine when a price or market conditions offer a good investment opportunity. How we handle money is what determines whether we will get rich or go broke trading these opportunities.
So, as you can see, having a good Forex money management system is extremely important.
But what exactly is money management?
Money management can be a strategy or a system to move money from one place to another minimizing losses and maximizing profits.
Many people think that setting their risk at 2-3% per trade and calculating the distance for stop loss and pip value in each trade is money management…
And yes, it’s an important part of a money management strategy, but there’s a lot more to it…
So how can we handle money properly?
In this article, we will discuss some Forex money management strategies
1) The Broker:
This is the first step to consider when managing money in Forex.
Most traders can afford to invest 1-5000 in their business, some of them even less than 1000. Although high leverage gives us the ability to buy/sell large amounts of money with a small margin deposit, not all brokers allow micro accounts where a trader can buy 1,000 lots instead of the mini 10,000 and standard 100,000 lots.
Some brokers even support lots of 100 base currency units, very few like Oanda will let you buy single units.
Micro accounts are better because they allow traders to spread risk evenly by avoiding asymmetric leverage, which is deadly dangerous for traders.
Watch this video for more information on the difference between using micro and standard accounts with accounts below 10,000 accounts and the dangers of asymmetric leverage: http://www.youtube.com/user/TheProTraders#p/a/u/0/V6aCmCCRdvQ
Forex Money Management Strategies:
1) Fixed amount in dollars of direct debits:
This money management strategy is useful for quickly recovering from losses, the trader will trade a % of the account if successful but will trade a fixed amount when an unsuccessful trade occurs:
$10,000 2% risk = $200 RR= 2:1 GAIN= $400
$10,400 2% risk = $208 RR= 2:1 GAIN= $416
$10,816 2% risk = $216 RR= 2:1 LOSS= $216
$10,600 FIXED A= $216 RR= 2:1 LOSS= $216
$10,384 AT FIX= $216 RR= 2:1 WIN= $432
$10,816 2% risk = $216 RR= 2:1 GAIN= $432
$11,248 2% risk = $224 and so on…
It only takes you one trade to fully recover from two losses.
Compounding is a very powerful long-term money management strategy. Basically reinvesting the earnings from each successful trade and avoid making withdrawals for a relatively long period of time will boost your account like you never imagined!
3) Separate capitals
This concept allows for a more aggressive commercial approach.
The trader has divided his total trading capital into two, one for risk and one for safety.
The risk account is 5% of the total trading capital, the remaining 95% is in a separate secure account. The trader will only trade with the account at risk (5% of total trading capital), but will risk 15-20% of the account at risk. Each time he doubles the account, he recalculates the 5% of the total invested capital and splits the money equally between the two accounts.
Implementing any of these Forex money management strategies or mixing a few will allow you to maximize profits and minimize losses in the best way possible.