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The Essence of Forex Money Management

Forex Trading | by ForexCycle.com | Thursday, 17 April 2008 06:54 UTC

Any trading strategy is incomplete without Forex Money Management. It is not only about knowing the ins and outs of which currencies to trade and identify the entry and exit signals, it is also about manage the resources and integrating money management into the trading plan. It is essential for a trader to meticulously position size, margin, recent profits and losses and any contingency plans before foraying into the market.

Based on money management strategy, diversification, martingale and anti-martingale strategy and high return strategy, the various strategies for Forex Money Management are formulated for approaching money management. Most of them rely on the calculation of core equity – which is the starting balance minus the money used in open positions. If the starting balance is $10,000 and you have $1000 in open positions, your core equity is $9000. It is imperative that as a trader you need to adjust the dollar amount of your risk, with the rise and fall of the core equity.

If the core equity level falls, you can lower your risk amount, while you can also raise the risk level as your core equity rises. Just as on a profit of $8000, the core equity can rise to $18,000. Similarly, on limiting risk to $800, the core equity will fall to $8000. Experts opine that as you enter a position, it is advisable to try to limit risk to 1% to 3% of each trade. This reiterates the fact that, on trading a standard FOREX lot of $100,000, your risk should be limited between $1000 and $3000.

Forex Money Management is all about calculated risks at the right time and protecting your assets. It is imperative to understand that when placing options, and buying them; it is wise to get plenty of time on your side. Although, traders are known to identify trade direction, however, most fail to stay with trades simply because they cannot implement their money management correctly.

A few mistakes traders usually make and tips to overcome them and increase prosperity.

  • Most traders fail to understand the standard deviation of price, as it helps them to stay guard against it and its unpredictability. It further helps you to understand where to place stops in places for risk control, although you may gain nothing.
  • The leverage is essential as it is common to have stops outside of random unpredictability. However, the market also requires space to breathe, only possible with wider stops and lower leverage.
  • Risk control and an obvious stop are possible only if you trade valid breakouts, leading consequently to trade success. Moreover, you can also cut your trading frequency, by trading no more than once a month but make solid gains.
  • However, while enjoying profits, it is also important to bring the stop to close, to prevent losses by random unpredictability. These calculated risks will help you continue big trends and keep your stop well back.
  • It is always wise to have buy options open if you want to deal with unpredictability and get staying power.

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