To have a successful, effective Forex trading business you need to protect your funds, keep losses as small as possible, and allow big profit trades to run. Even though money management is the key to a profitable business in Forex trading, many traders only think of it last. In this piece we will discuss money management tips that have been successful on many, many occasions.
Keeping your money at a decent level is the biggest key to success. For example, if you lost 50% of the money in your account, then you would have to make back 100% just to be back at the starting amount. The following are Forex Trading Money Management Strategies to help you keep your money secure by keeping losses small and running big profits.
1. Make sure to Learn The 80 – 20 Rule.
This is a rule used in many facets of daily life. In business sales it is applied as follows: 80% of your profits are made form 20% of your clients. In Forex Trading 80% of your profits come from 20% of your trades. In other words, to be successful and keep your money secure, you need to get rid of the trades that are too risky.
A lot of traders simply make too many trades. The fact is that it is not the number of trades you make that makes you successful, it is the number of times you are right in those trades. By having some patience, you will be able to focus all your funds on trades with high odds and low risks. This allows you to eliminate high potential losers.
There are some traders who simply only trade once a week or even once a month. This style of trading tends to produce triple digit profits. Most traders will prosper by simply learning more is not necessarily better; less is is frequently best.
2. Make sure not to place stops in market noise.
Alot of traders believe they can trade using very close stops. They usually place them within the daily fluctuations and tend to lose. If you place stops within the normal daily fluctuations of the market, it may seem as though your risk is low. However, contrary to belief, your odds of getting stopped are very high due to the fact the chance of success is not in your favor.
A lot of traders put so much effort into limiting their risk, that they actually make it worse.
You must place your stop levels outside the daily fluctuation ranges and behind large levels of support or resistance. Yes, this may look like it is a high risk due to your stops may be out of your comfort zone, but the chances of you making a profit are actually increased.
3. Be sure to risk amounts that are actually worth something.
In order to cover the inevitable small losses, a trader knows he has to risk an amount that will make a difference in his/her account. For example if your risk percentage is 2% and your account is $1,000, then you are only risking $20. Do you really think that is going to make a difference in your account? Now, if you risk 10-20% on high odds trades you have the potential to make a decent profit. The key is to stay strong and don’t go against the goals and/or stops you put in place. No, this is not foolhardy. It is simply risking an amount that will be beneficial. Software such as Forex Megadroid and Forex Autopilot give you the option to adjust your risk levels based on your personal comfort levels.
4. Make sure you let your stops ride for a while.
When a profit is made, many traders what to be sure they do not lose it, so they take the actions to prevent any changes in the profit. However, this can be very costly. When in on a big trend, if you make sure you trail stop outside of the normal daily market fluctuations, and accept the smaller short term losses, you will have a bigger profit in the long run.
5. Make sure to view your overall account performance.
In other words, if you are doing well, go ahead and risk a larger percentage of your balance. However, if you are doing bad, lower the percentage of money you are risking. To put it in a more understandable comparison, a poker player adjust his/her bet based on the hand he is dealt, so the successful trader varies his percentage to be risked based on odds.
If you want to win, you have to stay in the game.
Most traders make the common mistakes of trading too much, taking trades with low odds, and risking too little money. These basically set the trader up for failure. The successful trader simply trades less, makes trades with higher odds, and risks a little more of his/her money. These actions increase is chances of making a profit.
Due to the fact that Forex trading is based on taking risks, you have to make risks that will make a difference if you are going to make a decent profit. By failing to follow these strategies, a trader will slowly lose all his/her money and never find the big trend to follow, and will eventually fail completely.
The tips in this article will help to maintain your money balance and help you to find those big trends to follow. Use them to your advantage and you will find greater benefits from forex trading.