Wednesday, August 23, 2017

Forex Money Management Skills

October 4, 2010 by  
Filed under Forex FAQ & Latest Post


In today forex faq, I will be going through with you a question that is posted by one of my forex newsletter.

I have been trading both demo and live since the beginning of 2010,but am yet to see remarkable improvement. Why? Because the net is always floaded with too much information and offers of softwares, indicators and systems. In fact it has reached a stage where by I was tempted to close the door to trading altogether but my mission statement of keeping on until I succeed is ever fresh on my mind.

Help me get a reliable system and money management method I can simply apply. Thank you once again and may God bless you.

First of all, I will like to commend on the perseverance spirit that this subscriber has. In fact, it is the exact perseverance that most successful traders have in their mind when they first started trading.

There is no one that can succeed smoothly without hurdles in the arena of forex trading as it is a part of the journey towards having success.

Most of you are looking for a reliable system and I will definitely recommend you to trade in the direction of the trend and make use of forex breakout strategy as your main trading system. As usual, the reason why I recommend you to take up forex breakout strategy is the ease of identifying as well execution.

As a new trader, the challenge will usually be your ability to identify a trade and that’s why breakout trade is suitable for you. When trading the forex breakout strategy, being patient is very important. You have to stick to the plan and only enter a trade when the price break out of the consolidation and the best will be to enter the trade only after the price comes back to retest the breakout trend line.

As for the money management issue, I will say that being realistic is the most important. I have seen new traders funding their account with $500 but wanted to make at least $200 per trade which is something ridiculous.

When you are trading, it is very important for you to predetermine the amount of loss per trade that you are willing to take. For me, I usually take a risk of about 3% of my trading account per trade.

When you have determined your risk, you will then decide on the number of lots to take per trade which is calculated by

Amount to Risk Per Trade/Stop Loss

With this calculation, you will be assured that your losses per trade stick to 3% of your trading account.

Once you have your risk per trade calculated, you need to work on getting into trades with high risk reward ratio. Let’s say that you usually risk 3% of your trading account per trade, you should be looking for trades that can make you at least 5 to 6% profit as it will then be able to give your high risk reward ratio.

The key to success for most traders is their risk reward ratio. With a high risk reward ratio, it will be able to compensate for the losing percentage that your strategy has.

Example:

If I have a trading account of $12,000

My amount to risk per trade will be = $12,000 x 3% = $360

If I am going into a trade with a stop loss of 20 pips = $200 (for standard account where 1 pip = $10)

Number of Lots = 360/200 = 1.8 standard lot

Let’s say that I have a strategy with 60% winning percentage and I place 10 trades per month.

I will have 6 wins and 4 losses.

If I always trade with a risk reward ratio of 1:2, below is what I will get every month.

My Win = 6 x $720 = $4,320
My Loss = 4 x $360 = $1,440

Total Profit = $2,880

With the example above, you will realize that there are a few factors that can increase your earning per month.

1) Your account balance – The bigger your account, the more you will make

2) Risk Management – The higher your RR ratio, the more you will make

These are the 2 areas that you should be concentrating on if you want to make a living from trading. You should spend time to grow your trading account and in turn grow your income.

I hope that I have answered your question and all the best to your trading.

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