Money management is one important factor in forex trading related to risk control. Trading is a business and the business of course there are risks. Regardless of our capital, of course, we want to limit the amount of risk that may occur. Learning to understand the risk management are the keys to success to generate consistent profit in the long term. Many novice traders whose accounts 'battered' because it does not apply to money management discipline, and some even do not know anything about money management. In this paper will discuss five main topics in money management that should be understood and implemented correctly and discipline in forex trading.
- The amount of risk per tradeGreat risk per trade is measured by the value of money, not with pips, and is usually determined in the percentage of capital or balance in our trading account. We just assume that there has been no trading positions and the balance in our account is still intact, the greater the risk per trade is the amount of losses that we specify in opening a trading position. There is no standard provision for this and could be among traders that different from one trader to another, depending on the financial condition of each. The clear use of funds that really are not going to be used in the near future, and avoid forex trading by using the funds for daily living. Assume that the allocation of funds for forex trading you are ready for the missing funds so that you do not emotional when trading.As an illustration, professional traders whose income is only from trading (stocks, forex, options etc.) Rarely risk more than 3% of their total capital. On the other hand, many traders who have experienced recommended size of the risk between 3% to 5% of the capital. But regardless of the size of the risk that you specify, you should feel comfortable with the choice so you can trade with calm and without emotion.Well, why big risk is measured by the value of money is not the pip? This is related to the size of the lot size or volume per trade that will be used in accordance with the calculation of the risk, or commonly known as position sizing that will be described below.
- The amount of lot size per trade (position sizing)Large lot sizes also called the volume (on the Metatrader platform), or anyone named quantity. Because it is already very popular Metatrader platform, forex traders are generally more familiar with the title of trading volume. How to determine the volume of trading based on risk commonly known as position sizing. With position sizing, great risk in the value of money will always be the same regardless of large stop loss (risk in the pip) that we set. Trading volume can be set in accordance with a stop loss of the most fit for us. For example, suppose we are trading with standard lot on the currency pair EUR / USD, so that its value per pip is USD 10. If we had a balance of $ 25,000, and the risk that we set to open a position is 4%, then great we risk is USD 25,000 X 4% = USD 1,000. Tell me of the results of our analysis is the most appropriate stop loss is 50 pips, then our trading volume in a standard lot is: USD 1,000 / (50 x $ 10) = 2 lots.(Note: The forex brokers in Indonesia there is a mention standard lot with regular lot, and account only for trading with standard lot is called regular account)
Well, if there are two traders with different capital but apply the same percentage of risk and stop loss (risk in pips) the same as well, of course they are different lot sizes. Traders who invest a greater trading volume will be larger even if the stop loss (risk in pips) both. That is why the amount of risk per trade is usually measured by the value of money, not to the magnitude pip stop loss.
- The amount of risk / reward ratioRisk / reward ratio is the ratio between the amount of risk (stop loss) and the magnitude of the target profit (reward) that we set. If the previous discussion we have determined the risk and lot size, then the next step is to determine the amount of profit targets that we want than the risk we have set previously. Similarly, the risks, to set profit targets no provision of raw, it's just that we should be objective and realistic given the current market conditions. Experienced traders suggested that the risk / reward ratio should be at least 1: 2, meaning that if our stop loss of 50 pips then our profit target should be at least 100 pips, even if it could be 1: 3 or more, the better. The goal is: if we can apply the risk / reward ratio to be consistent, over the long term will be obtained return (profit) is adequate although our overall profit percentage is still smaller than its loss. For example, a trader experienced 70% of the total loss position, but still generate a return of 15% of the total trading position, because applying risk / reward ratio of at least 1: 2 on each open position.The important thing to understand in this case is to determine the magnitude of the risk before calculating the profit which may be obtained.
- Money management should be able to control our emotionsBesides money management, another important factor in trading is emotional involvement. Both of these affect each other and if it is not understood correctly will bring a negative effect on trading. Poor money management can destroy our trading, as well as uncontrolled emotions. For example if we lack an understanding of money management so it is always loss in each of our trading position, it will be difficult for us not to involve emotions when trading. Conversely, the better we can apply money management in trading, our emotions will be more restrained in dealing with trading results. We can say successfully implement money management if we could manage the funds in a trading account with effective and not emotional.
- Money management will work well only if we master the trading strategyIf we do not fully master the trading strategy that we use so that always hesitate when trying to open a position, no matter how well our understanding of money management results will not be maximized.Trading strategies and money management is a major component in a trading plan that should be run simultaneously. Money management will work well only if we have mastered and confident on trading strategies that we use to generate consistent profit in the long term.
Source: Nial Fuller - www.learntotradethemarket.com
- The amount of risk per tradeGreat risk per trade is measured by the value of money, not with pips, and is usually determined in the percentage of capital or balance in our trading account. We just assume that there has been no trading positions and the balance in our account is still intact, the greater the risk per trade is the amount of losses that we specify in opening a trading position. There is no standard provision for this and could be among traders that different from one trader to another, depending on the financial condition of each. The clear use of funds that really are not going to be used in the near future, and avoid forex trading by using the funds for daily living. Assume that the allocation of funds for forex trading you are ready for the missing funds so that you do not emotional when trading.As an illustration, professional traders whose income is only from trading (stocks, forex, options etc.) Rarely risk more than 3% of their total capital. On the other hand, many traders who have experienced recommended size of the risk between 3% to 5% of the capital. But regardless of the size of the risk that you specify, you should feel comfortable with the choice so you can trade with calm and without emotion.Well, why big risk is measured by the value of money is not the pip? This is related to the size of the lot size or volume per trade that will be used in accordance with the calculation of the risk, or commonly known as position sizing that will be described below.
- The amount of lot size per trade (position sizing)Large lot sizes also called the volume (on the Metatrader platform), or anyone named quantity. Because it is already very popular Metatrader platform, forex traders are generally more familiar with the title of trading volume. How to determine the volume of trading based on risk commonly known as position sizing. With position sizing, great risk in the value of money will always be the same regardless of large stop loss (risk in the pip) that we set. Trading volume can be set in accordance with a stop loss of the most fit for us. For example, suppose we are trading with standard lot on the currency pair EUR / USD, so that its value per pip is USD 10. If we had a balance of $ 25,000, and the risk that we set to open a position is 4%, then great we risk is USD 25,000 X 4% = USD 1,000. Tell me of the results of our analysis is the most appropriate stop loss is 50 pips, then our trading volume in a standard lot is: USD 1,000 / (50 x $ 10) = 2 lots.(Note: The forex brokers in Indonesia there is a mention standard lot with regular lot, and account only for trading with standard lot is called regular account)
Well, if there are two traders with different capital but apply the same percentage of risk and stop loss (risk in pips) the same as well, of course they are different lot sizes. Traders who invest a greater trading volume will be larger even if the stop loss (risk in pips) both. That is why the amount of risk per trade is usually measured by the value of money, not to the magnitude pip stop loss.
- The amount of risk / reward ratioRisk / reward ratio is the ratio between the amount of risk (stop loss) and the magnitude of the target profit (reward) that we set. If the previous discussion we have determined the risk and lot size, then the next step is to determine the amount of profit targets that we want than the risk we have set previously. Similarly, the risks, to set profit targets no provision of raw, it's just that we should be objective and realistic given the current market conditions. Experienced traders suggested that the risk / reward ratio should be at least 1: 2, meaning that if our stop loss of 50 pips then our profit target should be at least 100 pips, even if it could be 1: 3 or more, the better. The goal is: if we can apply the risk / reward ratio to be consistent, over the long term will be obtained return (profit) is adequate although our overall profit percentage is still smaller than its loss. For example, a trader experienced 70% of the total loss position, but still generate a return of 15% of the total trading position, because applying risk / reward ratio of at least 1: 2 on each open position.The important thing to understand in this case is to determine the magnitude of the risk before calculating the profit which may be obtained.
- Money management should be able to control our emotionsBesides money management, another important factor in trading is emotional involvement. Both of these affect each other and if it is not understood correctly will bring a negative effect on trading. Poor money management can destroy our trading, as well as uncontrolled emotions. For example if we lack an understanding of money management so it is always loss in each of our trading position, it will be difficult for us not to involve emotions when trading. Conversely, the better we can apply money management in trading, our emotions will be more restrained in dealing with trading results. We can say successfully implement money management if we could manage the funds in a trading account with effective and not emotional.
- Money management will work well only if we master the trading strategyIf we do not fully master the trading strategy that we use so that always hesitate when trying to open a position, no matter how well our understanding of money management results will not be maximized.Trading strategies and money management is a major component in a trading plan that should be run simultaneously. Money management will work well only if we have mastered and confident on trading strategies that we use to generate consistent profit in the long term.
Source: Nial Fuller - www.learntotradethemarket.com
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