In forex you have one tool that allows you to create wealth quickly and that’s leverage. Of course when you trade on leverage you must a strict forex money management system in place to protect your equity at all costs. Let leverage work against you and you will soon be wiped out.The way you manage risk, will determine your long term success at forex trading. Here we will give you some points to keep in mind.
Forex Trend Following Money Management
If you are following long term forex trends then you will have probably far more losers than winners – but your winners should be far bigger. It is not uncommon for a long term trend following system to lose 80% of trades and still make a big overall profit.
The major problem with forex trend following is not placing stops – but how to trail them. If you are forex trend following, you need to trail your stop behind normal volatility to keep you with the trend.
The best way to do this is – to wait until the trend is well underway and trail the stop behind a key moving average. You can experiment with various moving averages but a good one is the 40 day. Keep in mind, at the end of any big trend you have to give a bit of profit back, as you don’t know when it’s going to end.
We like the 40 day ma combined with trend line support.
Once a trend is underway, to add to positions the best way to do this is on new breakouts to highs or lows or dips to the 20 day ma.
Forex Swing Trading Money Management
Money management in swing trading is different to trend following. You are looking at far smaller profits and your better off to work with a target and take your profit early.
For example, if you are looking for a level of resistance to be tested, take the profit just before its hit and bank it. Swing trading profits can disappear just as quickly as they appear, so bank them.
Money Management on the Account
You have to decide how much to risk per trade. While 2% is a good number for larger accounts, it’s not an option for small accounts. On a small account risk 5 – 10% and de leverage. Sure, you can get up to 400:1 leverage with many forex brokers but your stop has to be closer. You are better off on a small account to cut back leverage and have a wider stop. This increases the odds of success and prevents your stop being hit by random volatility.
Variation of Bet Size
Just as a good poker player will vary his bet size, in line with the perceived odds – so can you in currency trading. There is an argument that all trades should be treated the same. We like to weight trades and hit the ones we think have high odds, with as much money as we can afford.
The above is personal preference – but we think varying the bet size, is a good way to build profits fast, particularly on smaller accounts.
Putting it all Together
Many traders want to restrict risk so much they actually create it. They simply have their stops to close. On the other hand, you have the trader who leverages their trades to much or let the stop take care of itself and get wiped out.
Taking Calculated Risks at the Right Time
There is a delicate balance to play especially on small accounts. You need to take calculated risks, based around the odds. You then need to risk as much as you can afford at the right time. You have to take risks! – This is the nature of currency trading. With risk goes reward, you can’t make big profits unless you take a risk. Be sensible though – always place stops, only trade when the odds are in your favor and don’t over leverage!