Money Management and Forex Trading - the Key to Bigger Gains

By: David Windsor

Money management is a bit like sex, we all do it but we don't talk about it much yet, if you don't employ proper money management you won't win. Let's look at some basics to do with money management.

Money management is the difference between making stellar gains or wiping your account out. Here are some important points to keep in mind when adding it to your forex trading strategy.

Risk & Reward

Risk goes with reward this is common knowledge yet, many traders try to restrict risk so much they actually create it and ensure they lose.

For example day traders think their taking small risks as their stops are close but their 100% guaranteed to lose over time because all short term volatility is random.

The risk looks small but the odds are stacked against them.

Another example of trying to restrict risk to much is trailing a stop to close and getting stopped out by normal volatility and sees the trader get stopped out to soon.

These traders need to make a study of standard deviation of price part of their forex education.

Betting to Win

Just like the successful card player you need to load up your bets on high odd hands and fold losers quickly. When you have a high odds trade denoted by your forex trading system up your bet size.

You here many traders bang on about risking 2% per trade but this is ridiculous for most traders.

For example on $10,000 account that's $200! How close would your stop have to be?

To close and guarantee your stopped out by volatility.

If you want to win bet 10 - 20% on your high odds trades.

Stop placement

In forex trading most traders like to trade with stops behind support and resistance and you will notice on many occasions how many times a price spikes through the stop in the day and then closes below it.

If you can always use a "stop close" this will prevent from daily volatility hitting your stop in the day session or if you cant keep an eye on the market use "at or in the money options"

Trailing a stop

If you are long term trend following you need to give the market plenty of room to breathe and keep your stop back. Don't jack it up after a day or so like most traders do - leave it alone. When you have good profits move it behind key support say at 40 day moving average penetrated on a close basis which works well.

If you want to follow long term trends, you are going to have to accept that you will give a lot back at the turning point - but if you get 60% of the major trends you will do well.

Targets

I find stop trailing hard and like to work with a target and get out when its hit.

If the move carries on so what? I am happy, as I got what I want.

In shorter term swing trading, targets are essential as these smaller profits can disappear quickly.

Finally Remember This:

How you deal with risk, will be the difference between you losing or winning at forex trading. Try and restrict risk to much and you will guarantee you lose, but take meaningful risks at the RIGHT time, with courage and conviction and you could enjoy fantastic currency trading success.

Remember the old gamblers saying:

"There's a time to hold them, a time to fold them and a time to get out of town fast"

Its very applicable to forex trading and money management!



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