Forex money management is the key to making bigger profits yet most traders have no idea how to do it correctly and more traders lose due to poor money management than any other reason. Here we will look at how to do it properly...
Utilize these points as the basis of your money management and you will have better risk to reward and better profits.
1. Risk Meaningful Amounts
Many traders want to take so little risk in forex trading they put their stops so close their bound to get stopped out by normal volatility. Understand this - forex trading is risky, you have to take risks and a stop to close, simply guarantees a wipe out.
This is why day traders and scalpers always lose, because their stop is in the way of random volatility.
There is of course a balance but most traders have their stop to close and you need to take a bigger risk when market conditions dictate which we will come back to in a moment.
2. Do Not Over Leverage
If you are going to take more risk per trade, then you need to de leverage.
Forget about 200 - 400:1 that most brokers offer you, this is madness for small accounts under $1,000, use 10:1 and build up as your account grows.
Over leverage simply means account wipe out.
3. Remember the 80 - 20 Rule
The 80 - 20 rule is used a lot in business and postulates that 80% of your profits come from 20% of your clients.
This rule can be applied in many areas of life and in forex trading its very applicable and means - cut you're trading frequency back!
Many traders think the more they trade, the more they will make but the reverse is true. All they do is end up taking trades that are not good risk rewards and lose.
Wait for the really highs odds trades and hit them. I know traders who trade around a dozen times a year yet, make triple digit gains.
Trading less can mean making more for most traders so cut back and only hit high odds trades.
4. Risk More Per Trade
If you are trading high odds set ups then you can risk more on them and make the gain worthwhile. Many so called experts tell you should risk only 2% per trade but consider on a small 1,000 account that's $20.00 - well if you risk that your stop is so close normal volatility will get you. Look to risk 10% or even 20, on the high odds trades and have the courage of your conviction.
5. Don't Diversify
This is ok if you're trading a large account of $50 - 100k - but for small potato investors to diversify for the sake of it, doesn't reduce risk at all but simply dilutes profits.
Focus on one trade only and don't dilute its potential.
6. Take Profits Early or Partial Profits
On surges in price from fair value in many instances it's a good idea to bank a profit as a currency becomes over bought or oversold and then wait for the next re entry - the problem with this is if it's a big trending move you can end up out the market and watching the trade pile up bigger profits and your not in on the action.
There is a simple way around this bank 50% on the surge and then look to put it back in on a retracement back against you. If the moves carries on your still in.
I have found the above smooths the equity curve and it helps traders remain focused and disciplined.
When you trade a forex position you are immediately at risk and how you control the risk, will determine how good your profits are going to be.
The above tips are designed to hit high odds trades then, take calculated risks when the time is right and at the same time protect your core equity.
Money management should be a key area of your forex education, so learn how to do it correctly and you could soon be on the road to forex trading success and triple digit gains.
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