Forex Money Management
A trader's money
management style can be
the difference between a
loss and a gain. While
it is often viewed as
unpleasant and even as a
burden, this aspect is
crucial to Forex trading
success over the long
term.
Forex money management
forces a consistent
monitoring of a trader's
position and to accept
the losses when
necessary. Most people
do not care for this
aspect of trading, but
it is very important.
In many cases of large
losses, poor money
management was the
culprit. Everyone wants
the $1 billion profit in
a single day, but that
is a market rarity. Good
Forex money management,
though, can give a
trader much better odds
of a large gain than a
trader who has little or
no money management.
Larry Hite, a very
successful day trader
and trend follower,
advises beginner traders
to risk only 1% of their
total equity on any
trade. At 1%, a loss is
very minimal and it is
much easier to recoup
and rebound.
On an individual trade,
the 1% makes little
difference and even if
the trader is wrong 20
times, he or she will
still maintain 80% in
equity. This type of
Forex money management,
however, requires
discipline which is
often in short supply
with many traders.
Money is easy to lose,
but not so easy to make
back. This attitude of
the market is what wise
traders must keep in
mind to avoid big
losses.
For example, a trader
invests $100,000 and
loses $50,000. This is a
50% loss. However, the
percentage that that
trader must make in
order get back to the
original $100,000 is
actually 100%. This
would mean that there
was a 50% drawdown, the
percentage of the
difference between the
peak and trough of an
investment.
It is because of this
factor that traders who
are joining the Forex
market for the first
time should use their
speculative capital
(money set aside for
trading purposes with a
high probability of
loss) only.
In deciding how much
money to begin trading
with, it is advisable to
select an amount that
can be considered as an
acceptable loss. That
number, divided by five,
allows the trader more
trade attempts - and
five times to take a
loss.
Another effective Forex
money management
strategy is to establish
a high reward to risk
ratio.
When there is a
potential to make 3
times more than is being
risked, or a 3:1
reward/risk ratio, it is
a good time to trade.
This is a high reward to
risk ratio.
When using this
strategy, the chance of
a profit is much greater
than lower reward to
risk ratios. This also
leaves much more cushion
in the event of a loss.
Good Forex money
management can take a
trader from gambling
with his or her money,
hoping for a gain, but
probably encountering
many losses, to
successfully trading
while maximizing gains
and minimizing losses.
It may not be as
exciting as other
aspects of Forex
trading, but for traders
who want higher gains,
money management is an
absolute necessity.
Dave Hikade began
trading over 10 years
ago and offers a FREE
Forex Trading
Newsletter:
http://www.forex-trader-basics.info
For more information on
Forex Money Management
go here:
http://dachsales.com/rec/moneymanagement
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