Golden Money Management Rules For Forex Trading

Golden Money Management Rules That Help You Trade Forex

Profitably

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(1) Use Leverage Wisely

Insanely high leverage offered by most forex brokers.

You can get as high as 500:1 leverage. That means you only need to put 0.2% of the total transaction value as margin to open a trade. To put it simply, you only need to have $200 in your trading account to open a trade with a total transaction value of $100,000.

With high leverage, you can run up your account as quickly as you can blow up your whole account.

High leverage can be used to your advantage to make huge profits ONLY WHEN YOU HAVE A PROFITABLE STRATEGY

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(2) Know Position Sizing Without proper knowledge of position sizing, many

beginner traders make the mistake of risking too much money per trade.

Misconception that bigger stop loss means risking more money per trade while smaller stop loss means risking less money per trade.

That is ONLY true if your trade size remains the same for both trades.

Here is where position sizing comes handy. If you need to place a bigger stop loss for a trade setup but you only want to risk the same amount of money per trade, the trick is to reduce your trade size(i.e. Position Size).



(2) Know Position SizingLet me illustrate what I mean:

To size a position, you need to know:

How much money you want to trade

Percentage risk per trade

Difference between entry price and stop loss

Pip value per standard lot of the currency pair

(A) Imagine that you have an account with 10,000 US Dollar and you only want to risk 2% per trade. You would like to open a position on Euro/USD and place a stop loss of 20 pips. The pip value per standard lot is 10 US Dollars. The way to calculate your position's size is:

Position size = ((account value x risk per trade) / pips risked)/ pip value per standard lot

((10,000 US Dollars X 2%) / 20) / 10 USD = (200 USD / 20 pips) / 10 = 10 USD / 10 USD = 1 standard lots (100.000 currency units)



(2) Know Position Sizing(B) Imagine that you have an account with 10,000 US Dollar and you only

want to risk 2% per trade. You would like to open a position on Euro/USD and place a stop loss of 100 pips. The pip value per standard lot is 10 US Dollars. The way to calculate your position's size is:

Position size = ((account value x risk per trade) / pips risked)/ pip value per standard lot

((10,000 US Dollars X 2%) / 100) / 10 USD = (200 USD / 100 pips) / 10 = 2 USD / 10 USD = 0.2 standard lots (20.000 currency units ; 2 mini

lots)



(3) Cut Losses Short

You should have already heard the old saying '' cut your losses short and let your profits run''.

In fact, all traders are aware of this BUT very very few traders actually have the discipline to stick to this golden rule.

Let me illustrate how important it is to control your losses and preserve your trading account using the diagram below:





As you can see, you need to make a 100% return ONLY to break even after you have lost 50% of your trading

account. As you lose more of your trading account, it is only getting more and more difficult to recover back your initial trading capital. That is why only traders who are willing to

cut their losses early will eventually become profitable traders on a consistent basis in the long run.



% Risk Per Trade If You Are Risk Averse & Prefer Longevity of Your Capital

Always risk 1% to 2% of your trading account per trade. The rationale is that your account will not likely get wiped out even if you suffer a long string of draw down, and you will still have ammunition left to fight back.

A good way of protecting your trading account. Compared to a higher percentage risk per trade, let say 10% risk per trade, your account is still relatively healthy even after 20 consecutive losses.

Downside: you will take a very long time to recover your losses if your account suffers an unfortunate big draw down of 30% to 50%.



% Risk Per Trade If You Are Risk Averse & Prefer Longevity of Your Capital

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Golden Money Management Rules For Forex Trading