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6 Steps to Proper Money Management in Forex

Building a valid trading system for trading Forex constitutes only a part of the successful solution.  Traders also have to consider under what money management rules they plan to operate. The steps provided below may show a possible way to go.
1st Step – Decide your risk tolerance.  Day traders should consider maximum daily amount they are ready to lose while position traders have to consider longer term.
2nd Step – Find your exit point. Where the price has to be to show you that your trade was wrong?  That is your maximum exit point.  Subtracting it from current market price will give you your exposure per trade or how many pips you can lose.
3rd Step – Calculate the maximum amount you can trade.  Dividing your invested capital by maximum possible loss on a trade will give you how many lots you can trade.  Beauty of the Forex is that it is so scalable that many brokers will let you trade even .01 of the normal lot called micro lot.
4th Step – Decide when to increase your trading activity.  If you are successful, your account value will increase.  You have to decide before hand when you plan to increase your activity.  This has to be applied systematically regardless if your plan is to adjust your trading activity daily, weekly, monthly or whenever you hit certain percentage gain.
5th Step – Take part of your profit out.  When you increase your position size, the amount of tolerable loss will increase as well.  If you are successful, then that amount can grow exponentially and ultimately the amount you are risking can represent the value of a car or a house. To take that pressure off, I learned that the smartest way is always to take good chunk of your profit out.  It can be done on a weekly, monthly, or yearly base but it should be done in a systematic way.
6th Steps – Automate it all with a spreadsheet.  Performing all steps above manually can be time consuming, and thus your mind may find a way to trick you and skip them. Consider putting it all in a spreadsheet so you automatically get your money management parameters.  This way you will have no more need to think about them.
ch17 6 Steps to Proper Money Management in Forex
Well, do all of this consistently, and let the money roll!  And don’t forget to keep the journal, so you can learn, get even better, and reach the sky.

2 comments:

  1. Anonymous says:

    Nice Article... Keep it up

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