Forex Money Management - the Key to Forex Trading Success

Most traders take a lot of time thinking about how to win and never really consider Forex money management but it's actually the key to long term success and here we will discuss it in more detail...

A successful trader once said to me if you take care of the losses and defend what you have, the profits will take care of themselves - if you fall to far behind, it's a hard road back and it is - lose 50% of your account and you need to make 100% to get back to square one.

We have all heard the saying cut your losses and run your profits and its sound advice but how do you actually do it in practice?

Understand Volatility in relation to Stops

The first point to make is you need to employ sensible stops which take into account market volatility.

Most traders simply place their stop to close and are guaranteed to get stopped out and have no chance of winning.

The perfect example of this is the day trader. Any stop in a daily range is in random volatility and he is odds on to lose - sure he has kept the loss small but there is no point in having a small loss frequently, with no chance of winning!

Its not just day traders who make this mistake most of the traders I have taught are obsessed with close stops and lose.

Stops need to be placed outside of random volatility and while it may appear, you take more risk, your odds of NOT being stopped out are better.

Your Risk Reward is NOT Your Target - Your Stop!

Many traders think the risk reward of a trade is their target minus their stop - but this is an opinion and is not the true risk reward; the true risk reward takes into account the probability of the outcome.

Most traders can place stops outside of random volatility, you can learn this quickly and easily, the real problem they then have is trailing the stop.

Trial Stops Slowly or You Wont Get Big Profits

Traders always want to lock in and protect profits and move stops to quickly and put them to close and get stopped out. The trend then continues the way they thought and their not in!

Always trail stops slowly and allow trends to get going - before you jack the stop up, you need to give the market room to breathe

How Much Should You Risk per Trade

The other point to keep in mind is how much should you risk per trade?

Common wisdom is 2% but on most small accounts this is rubbish!

Say you have $1,000 account, your risking $20.00 - well you wont make much on that and this will increase your odds of being stopped out as the stop has to be close.

On a small account risk 10% or even 20% and only hit high odds trades.

Creation of Risk By Trying to Restrict it to Much

In forex trading most traders try and restrict risk so much they create it, by having stops to close and moving them to quickly - don't do this! It's not being rash its simply you must take a calculated risk to make a reward.

Sound Money Management Is Based on

Knowing when to take a risk and taking into account the probability of the outcome in terms of money risked. In Forex Money management, your goal is to maximize your rewards, by taking calculated risks at the right time and risking enough to make a big gain - but enough to help you stay in the game.

Forex money management is one of the biggest challenges you face - picking trend direction is easy, trying to enter and stay with the trends by putting stops in the right place is the hard part.

Make sure you spend plenty of time on money management, as you can have a successful system - but without good money management you will never win.