Money Management - Forex Education

Copyrighted by International Business Times

Money Management Basics

Did you ever think about the difference between a new trader and a professional trader?
In our trading life we can experience that:
- A new trader thinks about how much they can win
- Professional traders think about how much they can lose
No trader is right 100% of the time:
- That means managing your risk is key to long-term success
Be prepared to take on a loss and manage your risk appropriately.
- Use protective stops whenever possible
- Don't let your emotions change your trading approach
- Before entering a trade, determine where you will get out of the trade
Determine your entry - Identify your risk - Project your potential profit
When we toss a coin and choose heads or tails, we have a 50% chance of being correct.
- Win $1 when we are right
- Lose $1 when we are wrong
To be profitable, one of two things needs to be done:
1. We need to win a higher percentage of the coin tosses (trades)
2. We need to profit more when we are right than we lose when we are wrong
- Profitable traders know there is no guarantee that any one trade will be profitable
- They detach themselves from the outcome of any one trade
- They treat trading as a business

Managing Your Trades

- 1. Think about winning half of our trades
- 2. Use the classic 1:2 risk/reward ratio

This means if you trade with a Stop Loss of 20 Pips and a Take Profit of 40 Pips, you still will be very profitable if you win half of your trades.

What if the market reverses just before hitting my target?
Make a protective stop to break-even when/if the market moves halfway to your target. This means, in the same example if your trade made already 20 Pips, move your Stop Loss up to your entry.

Managing Your Account

Don't risk more than 5 % of your account balance at any one time.
For example you have an account balance of 10,000 USD, count like this:
Stop Loss: 5 % * 10,000 USD = 500 USD

Risk means:
1. Determine the stop distance on your trade
2. Determine the pip cost on your trade

Conclusion

1. Identify where you are going to get out before you get into a trade
2. Use a protective stop and have it in the market whenever you are in a trade
3. Use a 1:2 risk to reward ratio so you can be profitable if you win half of your trades
4. Never risk more than 5% of your account balance at any one time
5. Obey all rules all of the time!