Money management is a good strategy to have a hold of when trading.
It is much better to create a strategy which outlines how much you make and lose each trade, as you are in a better position than most who are not doing this.
We will look at some key examples in this post.
Lets look at some examples now…
Example A - account size £1000
Taking a 2% risk maximum, A would only be allowed to risk £20 maximum on any given trade. This would mean perhaps trading £1/2pp at maximum on an intraday level and perhaps 10/50p on longer term trades. These are all dependant on the specific trade of course. Knowing your maximum shows you how far you can go in regards to money management.
One thing to make you aware of is that just because A's max risk is £20,this does not mean you should risk all of it on each trade. Sometimes a trade setup may dictate 1% or 0.5%, while others may take the full 2%. You may want to know, what if my risk is 2.1%?
Well it is simple really, don’t make things advanced and don't settle no matter what. You don't take the trade! You must value yourself much higher, the trade is not controlling you, but you are controlling the trade. If a trade setup does not meet your requirements, you don't make it fit, you wait for one that does.
#1 Rule - Don’t lose more than you win on trades
Many things most would think do not need to be said I have to say because when someone trades, you will be surprised as to what many people need to be told. This is simple money management, don’t lose more money on a loss than you do on a winning trade.
In fact, you should look to make two times, if not three or four or so on. At a bare minimum you should be trading and making the same on a win or a loss. When you think about it, the more made from winners allows less accuracy to be profitable.
If you go for 2:1, which is making £60 on a win for example and £30 for a loss, this means you only have to be 33% accurate to be at break even. 3/10 is basically break-even, if you can get 6/10 and even higher, you are well into the money. The closer your loss amount is to your win amount, the harder to make money becomes.
What is your Forex strategy in regards to money management? Leave a comment below.