Monday, June 8, 2009

3 Golden Points of Forex Money Management

Once upon a time, I was a reckless Forex trader. This was how I would trade:

1. Make a brief analysis on the market based on charts without indicators.
2. Make a buy/sell decision based on pure animal instinct.
3. Execute a trade without knowing how much I put at stake.
4. Adjust stop loss and take profit freely

And even though at times I won trades more than lost, my balance still went down because mostly my wins were small but my losses were big. I lacked proper Forex Money Management. And that was until I learned the 3 Points. The 3 Golden Points of Forex Money Management. What are the 3 golden points? They are rules to follow whenever you want to open a trade and these rules must be followed in order. And they are:

1. Determine how much of your capital you want to risk losing on the trade - either in cash value or percentage.
2. Determine the stop-loss level.
3. Calculate the lots/units to use to trade based on your stop-loss level, capital and risked size. This is done using a formula that you have created on your own, on a spreadsheet or on a piece of paper.

Then when you have done the above 3, you can open a trade with the number of units from 3 and the stop-loss level from 2. Take Profit isn’t a big issue here. Take Profit can be bigger than stop-loss or smaller, depending on your own trading strategy. As for me, I often skip Take Profit as I like to let the market flow in my direction for as far as it would and I would manually close the trade when I notice a potential reversal.

Since I followed the above 3 points, I’ve had no problem keeping my Forex capital steady and I’ve had no problems with negative cash results that came with positive trade results, aka winning more but capital dropping. The only problems left were from faults in trading strategies.

• Posted by josh at 20:25:21 in Financial Management
• 1 comment