Money Management Principles in Forex Trading (Part III)
Perhaps the best advice that you will receive in your trading career is live to trade another day. Currency markets are volatile, brutal and unforgiving. You should learn to survive in the markets.
The most common factor that causes many currency traders and investors to blow up their accounts and lose all their money is greed. Once you start taking unnecessary risks you are in trouble. You want a secret formula that never loses a trade. You will start looking for the Holy Grail technical indictor or a forex robot that can make you rich. You will believe that by discovering one, you will become rich.
Unfortunately there is no Holy Grail in trading. You must learn not to risk more than 2% of your account on a single trade. Incrementally grow your account over time and never ever be tempted to risk big making one single winning trade that can make you rich.
You should know how much you are willing to risk in a single trade. I said 2%. But if you want to be aggressive you can go up to 5% but stay between 2-5%. Dont exceed it. If you are conservative, on the other hand, you should consider risking between 1-2% only.
Once you have decided on the risk you are willing to take, knowing the rest is simple. Suppose you have a $50,000 account and you decide on a risk of 2%. How much you can risk on a single trade? You can only risk (50,000) (0.02) =$1,000. This is the maximum you should risk on a single trade.
However, if you are in more than one trade at the same time, the amount may be higher. Suppose, you are in 3 trades and you risk only $1,000 per trade. So the total amount at risk will be $3,000. Once you have determined your risk level, you are ready to determine the trade size.
Trade size is the number of contracts you purchase in any one trade. To determine the trade size, you need to first determine where you want to put your stop loss. Lets use an example to make it clear. Suppose you are willing to risk $1000 on trading EUR/USD pair. You decide on a stop loss of 50 pips. Each pip on EUR/USD pair is $10 worth. So the number of contracts that you need to trade are (1,000)/ (50) (10) =2.
By calculating your trade size, you have taken the guesswork out of your trading once you have determined your risk level. You can sleep well now. You know how much of your money is at risk. You are going to be able to trade tomorrow. No matter what happens today.
Using these common money management rules will help you avoid the pitfall of losing almost all the money in your account. Learning to survive the markets and trade another day is the essence of trading. This can help your trading take the next level of profitability. - 23199
The most common factor that causes many currency traders and investors to blow up their accounts and lose all their money is greed. Once you start taking unnecessary risks you are in trouble. You want a secret formula that never loses a trade. You will start looking for the Holy Grail technical indictor or a forex robot that can make you rich. You will believe that by discovering one, you will become rich.
Unfortunately there is no Holy Grail in trading. You must learn not to risk more than 2% of your account on a single trade. Incrementally grow your account over time and never ever be tempted to risk big making one single winning trade that can make you rich.
You should know how much you are willing to risk in a single trade. I said 2%. But if you want to be aggressive you can go up to 5% but stay between 2-5%. Dont exceed it. If you are conservative, on the other hand, you should consider risking between 1-2% only.
Once you have decided on the risk you are willing to take, knowing the rest is simple. Suppose you have a $50,000 account and you decide on a risk of 2%. How much you can risk on a single trade? You can only risk (50,000) (0.02) =$1,000. This is the maximum you should risk on a single trade.
However, if you are in more than one trade at the same time, the amount may be higher. Suppose, you are in 3 trades and you risk only $1,000 per trade. So the total amount at risk will be $3,000. Once you have determined your risk level, you are ready to determine the trade size.
Trade size is the number of contracts you purchase in any one trade. To determine the trade size, you need to first determine where you want to put your stop loss. Lets use an example to make it clear. Suppose you are willing to risk $1000 on trading EUR/USD pair. You decide on a stop loss of 50 pips. Each pip on EUR/USD pair is $10 worth. So the number of contracts that you need to trade are (1,000)/ (50) (10) =2.
By calculating your trade size, you have taken the guesswork out of your trading once you have determined your risk level. You can sleep well now. You know how much of your money is at risk. You are going to be able to trade tomorrow. No matter what happens today.
Using these common money management rules will help you avoid the pitfall of losing almost all the money in your account. Learning to survive the markets and trade another day is the essence of trading. This can help your trading take the next level of profitability. - 23199
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading and swing trading stocks and currencies. Trade Dow Futures. Learn Forex Trading.
posted by X - Men @ 9:36 AM
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