Secrets to Profitable Forex Money Management
One of the main reasons why over 90% of new Forex traders lose their entire accounts within a few months is because they don’t understand that their new profession carries high levels of risk.
To counter this problem, they need to grasp the concepts of good money management as quickly as possible.
Although mastering money management does not always bring benefits in itself, it helps to protect existing profits or prevent fatal losses. It is essential to ensure the longest possible survival time. The best Forex traders adapt extremely first to survival before making a profit.
Money management involves techniques that basically show you how to reduce risk in trading and in doing so will greatly help you preserve your account balance. These strategies will show you how to become a profitable and successful trader. For example, one of the main differences between Forex experts and novices is that the experts have acquired an astute understanding of the facets of this subject.
The fixed risk ratio is one of the simplest money management strategies and is based on the concept that you should never risk more than a predetermined percentage of your account. The most popular hazard ratio right now is 2%.
Risk exposure is limited to this recommended value by monitoring and adjusting the position size and stop loss of each trade accordingly. Position size represents the total amount invested per trade while a Stop Loss determines the amount placed at risk per trade.
Many inexperienced traders simply enter positions considering only their profit potentials and without controlling losses through properly calculated stop-losses. As such, their results tend to be disastrous.
Why is money management so important? To answer this question, consider the following simple example. Suppose you have created or obtained a Forex trading strategy that has a win-loss ratio of 90%, that is, 90 trades out of 100 will be successful. However, you still don’t know when the 10% loss will occur. Let’s take the worst case and assume it’s the first 10 results you get before you get winners.
Now, if you were unlucky enough to experience this streak and risked 10% of your account per trade, you would only be left with 34% of your total balance at the end. On the other hand, if you had just risked 2% per trade, you would still have 82% of your balance intact. Obviously, the second scenario gives you much better protection and survival prospects.
You need as much time as possible to select or create a winning forex strategy. Volatility, in particular, impacts many viable strategies these days by drastically reducing their profit potential. This is because too many human emotions are invoked in rapid succession, which weakens traders’ concentration and mental toughness to a minimum.
To combat these problems, you must use the concepts of money management to give you the ultimate period of time to find a winning strategy. Additionally, you should segment your total account balance into the maximum amount of risk you are willing to take before the need arises to re-evaluate your trading strategy.
