Newbies heading into forex trading tend to look for a shiny and fancy trading system, often thinking they will find the system to make all their dreams come true. Expecting millions upon millions of banknotes to start rolling in.
Whilst a profitable trading method is required to make money from trading, you’ll also need a profitable money management technique to fit that system also.
We’ve spoken to Binary Options Buff for the answer. Without him, the best trader in the world could give us all the tips and tricks but without a solid money management technique, we’d still be doomed for failure. Buff says:
Money management is constantly overlooked – don’t let it be your downfall.
It can take a new trader several months of switching between system after system before they realise it is not the system that is failing them.
Forex money management is how you manage your money when you make your trade. This term is used by traders when they are referring to how much they are risking within their account.
For example, if Dave says “I am risking 4% on this trade” it means that if Dave was to lose his trade he would only lose 4% of his overall account balance.
It is important for all traders, new or experienced to have a money management technique and to carry it out with consistency. One of the most-important aspects of this is ensuring that the traders live to trade another day.
Anything can happen in the markets so this method ensures that you will be able to trade again, regardless of what happens.
One reason that many traders fail despite using a profitable system is because their money management is poor – they are not giving their systems long enough to play out over time.
After you have decided how much you want to risk with each trade, it’s important before entering each trade to work out how much the position size should be. Something that regularly amazes me is the number of traders that don’t know position sizing.
This single technique is very important despite often being overlooked. Position sizing is important as it allows the trader to adjust their trade size depending on the factors of the trade. This could be the pair and stop size for example.
I often hear traders say they can’t trade the higher time frames because they don’t have enough money – this is precisely what position sizing solves. If they work out the position size, it allows them to make a bigger or smaller trade, dependent on the different trade situations.
Every trade will have a different size stop. Regardless of a trader entering the same amount on every trade, no matter what the size stop is, they would still be risking different amounts of money and different percentages of their account for every single trade.
For example, if you put a 20,000 trade on with a 20 pip stop you are risking twice as much as if you enter the same 20,000 with a 10 pip stop.
Working out the position size before each trade is done by using what we call a position size calculator.
A calculator asks questions which will need to be filled in such as: account currency, account size, risk ratio (either % or £), stop loss in pips and currency pair. After these fields are filled in, you will find out the amount you need to trade to risk the amount you input into the risk section.
When using the fixed percentage money method, it’s important for traders to set their goals in their trading journal. Future plans are also important for when they meet their goals so they can increase the money they risk per trade.
Doing this they get the best of both worlds – the trader can bet back to break even after any losing streaks as quickly as possible, and also take advantage of winning streaks when they come.