Jul 2 2009
Money management and risk management in
forex trading.
The risk management and money management skill is an essential part of forex traders whom want to be successful in money making. When we talk about money making, we don’t mean a quick rich method, we are referring to a consistence monthly income.
One of the most important thing a successful trader do is systematically plans his Money and Risk Management to avoid margin call ( The process of The broker cancelled your trade when the trade is against you and your money value drop to the preset number ). Money management is all about how the traders systematically decide their accepted risk level and how many lots ( volumes ) to trade in a single trade.
The risk level should be measured based on how many % percent of the account you will lose if the open trade is closed. In general, it should be set not more than 3% of the account size regardless of your used margin and available margin value.
How to plan the trading lot size?
For example, your trading account is $20,000. The stop loss should be triggered to 3%. Therefore $20,000 X 3% = $600. Let say the stop loss is decided at 30 pips, the pips value is $10. The number of lots to place should be calculated as follow:-
$600 / 30 pips / $10 = 2 lots
You trade 2 lots with the stop loss set at 30 pips.
If traders trade without money management, they are in fact gambling. They are not looking at long term return, instead only hoping for hitting the “jackpot”. Money management rules will make us very profitable in the long run. If we know how to control your losses, we will have a chance at being profitable.
Ready to make some pips from the Forex market? Wait ! Before you go too far, remember It is very important that you define how much you are willing to lose on each trade. A good trader always thinks about what they could potentially lose BEFORE thinking about how much they can win.
Do not forget the Trading rules that we had discussed before in our
forex education site.
1. Make sure you use only the money that you can afford to. Be sure that you can afford to lose all of them without having affect your daily life. - Forex trading rule 1. If you can not afford to lose this sum of money, you should not trade forex. This is the 1st and most important trading rule.
2. Never put emotional feeling in the game. Do not take revenge on the market in the event that you have make a lost. If your emotions rule you, you will never able to be a successful trader.
3. Keep discipline in mind. If you have a bad trade that day, you cut your loses and keep moving forward by following your trading plan. Lack of discipline is the biggest reason that trader don't find success.
4. Make full use of all your charts. You should read all your yearly, monthly and weekly charts to help identify the support and resistance line. We will cover it the later chapter, move on..
5. Keep your trading system simple. The more complicated a trading system is, the harder it is to trade with. Simple trading rule will helps you make better trading decision.
6. Test out the demo version. Go live only when you acquire enough skill.
7. Good trading is all about knowledge, do not rely too much on news. Technical chart indicator gives you simple way to process data into useful information.
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