Money management in forex trading not only about calculating profit or loss at each trading session.
However, this ability is necessary so that you can survive even if the market conditions are not on your side.
In short, money management in forex trading is a way for you to manage your capital in a transaction.
The ultimate goal is not only controlling the risk but also increasing profits.
Money management includes how many lots in each trading position, what is the distance between the entry point and the stop loss and profit target, and what is the maximum number of trading positions at one time.
Forex can indeed provide profits, but it is not always our position to profit.
It may be that we will be facing loss one or two times before profit again.
Maybe also we will be getting a continuous loss without knowing when it can profit again.
Using a stop loss can indeed limit losses, but how about successive losses?
Of course, the amount of loss will be even greater.
Recovery sometimes very heavily, the profits earned for months finally collapsed overnight, our psychology also dropped, which ultimately impacted on the quality of our trading.
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Why Need Forex Money Management?
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The principle of trading is similar to doing business like as in the real sector, both dealing with “uncertainty”.
In addition to determining profit targets, preparation is also needed to overcome the possible losses.
In trading, it is very important so that profits can be obtained consistently over a long time.
Expecting fantastic profits in a single transaction is no different with “gambling” and this is not the right way for forex business.
Money management is a way to manage capital in forex trading, which is useful for overcoming big losses in a single transaction.
To implement money management, more effort is needed to learn and diligently evaluate the results of its trading.
Forex instruments have very high volatility and even prices can reverse in just a few minutes.
Moreover, this instrument provides transaction facilities to buy and sell as an opportunity to makes a profit.
Changes in the direction that is not in accordance with the trader’s position can cause a loss and even a margin call.
Without proper money management, the profit collected from several transactions runs out in only one transaction, even eroding capital.
Money management tips.
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Forex trading is a risky business, you can lose money at any time, some even say more than 90% of traders fail and only 5% are successful in trading for a living.
You want to be part of 5% of successful traders, but also have to measure your financial abilities and skill capacity.
The most important tips in investing in the forex business are just spending money that affords to lose, it’s mean that you don’t use money that is important in your life.
For example, you have money for the education of your child, do not let this money be used to deposit forex, because your dream to multiply money can easily be canceled by the cruel of the forex market.
The next tip is to choose leverage that suits your capital if you have capital of only 100 $ maybe 1: 500 leverage is still worth choosing as long as you can apply position sizing safely, don’t be greedy.
Selecting the type of account is also important for money management if you are a beginner choose a micro account suitable for learning low-risk trading, but not all brokers offer this type of account.
The next tip is that you have to be disciplined in applying money management rules from preparation until you in trade.
An important component of money management.
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There are four main elements in forex money management, here are the explanations.
Risk Per Trade.
As the name suggests, risk per trade is the percentage of risk that you can bear for each transaction.
This percentage is calculated from all the capital you have, and there is no standard provision of what the ideal risk percentage is.
For example, The overall capital you have is $ 1000, and you can only tolerate the risk of 5% per trading session, so the value that you can trade every trade is $ 50.
.Even if you lose, there is still a capital reserve for the next trading session.
This component is a way of calculating the amount of lot that you will use in each transaction.
The calculation is based on the risk per trade and stop-loss that you set.
For example: Let’s just assume that the risk per trade you set is 5% from your capital of 1000$, so the value per trading session is $ 50.
Then, you make a buy transaction for the EUR / USD pair with a buy at price of 1.2330. And, your stop loss is set at 1.2280 (50 pips).
Then the amount of lot you use is $ 50/50 = $ 1 per pip.
So you have to adjust the position sizing for the value per pips 1 $, this depends on the type of account or the value of your broker’s contract.
This component describes the accuracy of your trading system.
The benefit is to determine a comparison of profit sessions and session losses all your trades.
For example, in 10 trading times, there is a loss of 6 times, and profit 4 times. That is, your trading profits are 40%.
What’s this for? If in this case, the risk of loss is higher than the chance of profit, then your endurance in the trading arena will be determined by Risk-Reward Ratio.
This ratio compares the amount of risk per trading session with the possibility of the amount of profit.
The risk-reward ratio will be taken into consideration whether you will continue the trading session or not.
In the case of risk per trade, you use the number $ 50 and the stop loss is also $ 50 pips.
Let’s just say your trading result shows that for every Profit session, you get 150 pips profit.
That is, every time you get a profit, the value is 3 times that of risk per trade.
That means, your risk-reward ratio is 1: 3.
The point is this risk-reward ratio to set your profit target and stop-loss, maybe there are those who use risk-reward ratio 1: .1.5 or 1: 2.
Which means if you use 1: 2 then, for example, stop loss 10 pips then the target profit is 20 pips, so even you one-time loss trades and one-time getting profit hence accumulation profit and loss will end with 10 pips profit.
Risk management forex.
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Risk management is about minimizing risk with the aim of maximizing profit opportunities.
By implementing good risk management, you will have full control over your capital.
Combined with good capital management, risk management will help you to “tame” wild markets.
There is a likeness of trading is like a game.
You cannot predict a hundred percent accurate steps to be taken by your opponent.
Likewise with trading. You will not be able to know exactly where prices will move even in the next hour.
One of the causes of failure of beginner traders is ignorance of the basis of good risk management.
Several methods of risk management tools, namely: stop loss, Trailing stop, cut loss, switching, hedging and averaging.
Stop-loss is a feature in the forex platform that is useful for limiting risk in trading, you can place a stop-loss when opening a new position, or modifying an opened order, some trader they use a script to open new entries and directly set the stop loss and target profit.
A trailing stop is a feature that is on the MetaTrader 4 platform where this is a method for risk management tools.
By click right on the ticket order, you will find trailing stop and find the number for the set of trailing stop values.
If you choose 10, then every floating profit is 10 pips, then the stop loss value will automatically move at a distance of 10 pips from the start you set the stop loss.
But to use this feature on the mt4 platform must connect to the server broker.
This technique is done by closing the loss transactions as soon as possible with the aim to avoid the risk of greater losses.
Traders who do not use stop loss and trailing stops, they prefer to use manual cut loss.
At certain points when the direction of the trend is not in accordance with the direction of the trader’s position, it’s time for him to cut loss to avoid greater losses.
The technique is done by closing the loss position and immediately taking a new position in the direction of the next price movement.
The idea is to recover losses caused by the position of the previous transaction.
This technique is more effective if done when there is a rapid and drastic change in price direction.
Do this technique if you are absolutely sure that the market will move quite fast.
Because doing this technique means you open a new position again which is certainly overshadowed by the risk of loss if the market turns around again.
Averaging is an extreme risk management technique because basically, this technique tries to “fight” the market.
The basic idea is that the market cannot move in one direction forever.
In this technique, the trader will open a new position when their order in a floating loss.
But the position uses the same position size.
So, for example, a trader open buy, then the price moves down.
At a certain point, he will make a new buy order with the same lot size.
And if the price still moves down at a certain point he will re-open buy as a new position with the same lot size, and so on.
There are three techniques for developing averaging strategies, namely pyramiding, martingale, and anti-martingale.
If the cost averaging one open position is added every time you experience a loss.
Then in pyramiding, the open position is actually added every time you get a floating profit.
This technique is more extreme than averaging.
Because not only the trader adds a new position when facing floating loss, but also uses a higher position size.
Using this technique requires large capital and strong psychology, and most of these techniques fail when long trends occur.
This technique is similar to pyramiding technique, where traders will add new positions when floating profit.
It’s just that the number of transactions is multiplied or uses a higher position size for each additional profit.
This technique will also be more effective if used when the market is trending.
Hedging strategy is to limit losses, this is a trader will open a new position opposite from the first position when the first position occurs floating loss.
For example, traders open to buy, then a few minutes later the price drops, so to limit losses he opens a sell position, so there are two open positions namely buy and sell at the same time.
Thus wherever the price will go of floating loss will remain the same value, as long as both positions are still open.
This technique requires high patience to wait for prices to be at the lowest or highest price to open lock hedging.
Money management and risk management are very important lessons to support the success of traders.
Having a good trading system if it is not accompanied by a money management plan and risk management will also cause the trading system to fail, because of dynamic market movements.
So keep trading with proper money management and discipline with your rules.
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