Money management in Forex trading is one of the most important problems of new and even advanced forex traders. Almost everybody can find a good trading system that can be profitable but something that causes the traders to lose and be negative at the end of the month, is lack of a proper money management strategy and discipline.
Although money management is so important and critical, it is very easy to follow. Forex money management have several different aspects and stages and should be started from the very first stages of your live forex trading business which is opening your live trading account.
This rule should be considered even when you want to open your live account. Lets say you have already practiced and demo traded enough and you feel confident enough to open your live account. Well, you can do that but what if you lose this money for any reason? For example your broker becomes bankrupt and closes the company and never pays your money back. Or you take a 20 lots position by mistake and you forget to set the stop loss.
It goes against you for pips and wipes out your account. You will not be able to start over, at least for a long time that you save some money. And this initial failure may have a bad impact on you and you may not think about forex trading anymore and you will lose the opportunity for good. Therefore money management should be considered even before live trading and when you want to open your live account.
The second stage is when you want to choose the leverage of your account. Nowadays you can have even a 1: I do not want to talk about leverage in this article because this article has to be focused on money management but briefly, leverage is the facility that your broker gives you to enable you to manage bigger amount of money using a smaller amount of money.
For example if a broker gives you a 1: But if a broker offers a 1: So why having a big leverage like 1: Because you can trade a huge amount of money and if your trade goes against you, you lose all your money very easily. Whereas if your account leverage was 1: The third place that you have to consider money management, is where you want to take a position. This rule should be applied to the positions we take too. This is the most important stage of money management, which is very easy to apply.
You just need to consider it and not to ignore it. Let me tell you something frankly and seriously. Do yourself and your money a favor: I can not emphasize on the importance of stop loss more than this. Setting a proper stop loss for each trade, is a different story. Some traders always consider a constant number of pips for their stop loss positions but this is not correct. Stop loss value can be different from time frame to time frame, currency pair to current pair and trade setup to trade setup.
Stop loss that I choose for a position which is taken based on a trade setup on daily chart, has to be much bigger than the stop loss I have, when I trade using a 15min chart. How to set a proper stop loss and target is something that has to be discussed in a different article.
I have already published an article about this subject: Lets get back to our money management discussion. So the third stage of money management is when you want to take a position. No matter what position you take and how big your stop loss is in different positions. Easy to understand so far, right?
Before I show you how you can calculate your position size, let me tell you another thing. If a position goes against you and you feel stressed out and you down on your knees and start praying and begging God to return the market and you can get out at breakeven, it means: You have traded with the money that you can not afford to lose and if you lose it, you will be in trouble.
And you have taken too much risk in your trade and you have not followed money management rules. And you have not set a stop loss and your account is so close to become margin called. If you trade like this, you should know that this is not trading. It is something else.
And if by any chance, market returns and you can get out at breakeven in one trade, you will be trapped in another trade and you will lose all your money.
Not all my positions are supposed to hit the target. Now I show you how easy it is to calculate your position size. This question refers to pip value of each currency pair.
One lot is , units of a currency in forex world. If you buy 0. Each currency pair has a different pip value. I will give you a calculator at the end of this article that can easily calculates your position size. I will also give you a pip value calculator. But before that, I just want to make sure that you understand how to calculate your position size manually.
It is now very easy to answer. So you should trade 0. It can be calculated through a simple equation:. Now you can answer it right away: Now that you have learned to calculate your position size, you can use the below position size calculator, whenever you want to take a position. It saves you some time. In case you like to calculate the pip value of currency pairs , here is a pip value calculator:. This was about calculating your position size based on the stop loss you should have for each trade.
But what about target? Most traders say, your target size should be at least the same size as your stop loss, if not bigger. But choosing the target is also dependent on the trade setup you have found. When you have found a long position, you should be able to find the next resistance level that may stop the price from going up. That level will be your target. Accordingly, when you find a short trade setup, you should be able to find the next support level that may prevent the price from going down.
Then if you see your target will be smaller than your stop loss, you should ignore that position and you should wait for another trade setup. Another strategy that helps you to make more profit and protect the profit you make, is splitting your position into two or even three parts and have a different target for each part.
For example you find a trade setup and based on risk calculation, you have to take a 2 lots position. Your position target should also be pips. You can take two one lot positions with the same stop loss, but for the first position you set a 50 pips target and for the second position you set a pips target.
When the first position target is triggered, you move the stop loss of the second position to breakeven entry price. Therefore, if it goes against you after triggering the first target, your second position will be closed with zero loss and you have already made a 50 pips profit with the first position.
Some traders are against this strategy. They say if you are confident enough about your trading system and if you have picked a good signal, let your target to be triggered with the full amount of your trade.
This is also true. When the first target is triggered, you just move the stop loss to breakeven for the second position and as long as the position keeps on moving to your favorite direction you hold the position and move your stop loss, candlestick by candlestick or pips by pips in this example. This is a good method for maximizing your profit.
This article was supposed to be focused on money management. But what is the relation of maximizing your profit and money management? Maximizing your profit is an important part of money management. If you succeed to maximize your profit in your trades, you will have a better risk-reward ratio. When your stop loss is the same as your target, you have a 1: It means 7 out of 10 positions you take, hit the target and 3 positions hit the stop loss.
This is a great result. However you should know that it is not always possible to maximize your profit like that and in fact maximizing profit is one of the hardest part of trading and needs a lot of experience, patience and discipline.
I think I have talked enough about money management and its important role in trading. I hope you always consider money management rules in your trading. Few months ago, a broker called and convince me to open a VIP account with his company.
After few calls I agreed and open account with USD 10, I got no experience and lack of exposure too. He just rushing me and promise to assist me when trading. So I felt safe. First 3 days was profitable and it boost up my interest in trading. I was shocked and broker asked me to top up my account so he can guide me again.
This happens for the third time too.More...