Money management, in Forex trading, is the term used to describe the various aspects of risk management and return on each trade you make.
A solid money management strategy is a key element in becoming a successful forex trader. Financial markets can be volatile and if you add leverage to this mix, as most traders do, the risks are considerable.
A strategy is important but the truth is that ultimately we will not know what might happen. Some trades will be winning while others will be losing.
Tip – You should never risk more than 2% of your trading account for any one transaction.
However, even when we use a strategy, and we believe that a certain trade has a 70% chance of succeeding, we can’t help but consider the remaining 30% which could lead to conclusions different from those assumed. The risk is high, we can lose the capital because the volatility of the market could suddenly follow a different trend.
What is the amount of capital to be invested? In general, a consideration widely accepted by traders around the world, you should never risk more than 1-2% of the trading account for each individual transaction.
But let’s get to the bottom of Money Management by going deeper into risk management to address the subject in a broad way.
Forex was born in conjunction with two events, the advent of the Internet and the Euro.
The Internet, in particular, has made it possible for individuals to trade with ease thanks to the ease of finding information 24/24 and the ability to operate without time or space limits on accessible platforms.
Over the years, in fact, brokers have multiplied and so the services offered, from demo accounts to language assistance, have reduced the costs of intermediation and offered the use of important levers. The 4,000 billion dollars per day in forex transactions explain well the growth of this market, even in Italy.
But this very attractive market can also be quite dangerous, and it is at this time that the right strategy of Money Management comes to our rescue.
The money management strategy is aimed at risk management with the aim of protecting capital.
To neutralize the risk is a good habit among traders diversify their securities and use the stop loss, or a level beyond which not to go when you decide to invest in both positive and negative, making use of technical analysis and fundamental one.
Many traders do not take full advantage of these functions. Often because they do not have the patience to constantly perform multiple investments at the same time, the calculation of risk and return in fact not only means making calculations but also means being able to generate returns on multiple securities even at the cost of losing time.
Risk management and return step by step
- Decide how much money you’re willing to lose
This is not something you should take lightly, in fact you have to be absolutely sure that you have the chance to risk, and if the idea of winning enticed, psychologically the loss annihilates.
- Choose the limit for your stop loss
The basic idea is to define the stop loss at a level that will undo the installation if it is hit or on the other side of a supporting surface or apparent resistance; this is the logical stop positioning. What you should ever do is put your stop too close to your entrance in an arbitrary position just because you want to trade a much higher size, this is greed, and it will come back to bite much harder than you can imagine.
- Enter the number of lots or mini-lots
A mini-lot typically amounts to about $1 per pip, so if your default amount of risk is $100 and your stop at a loss distance of 50 pips, you proceed to trade 2 mini-lots; $2 per pip x 50 pips stop loss pip = $100 risky.
To be successful in Forex trading, you need to understand not only market fluctuations and define your own strategies, but you also need to learn how to manage your capital by applying money management strategies.