Money Management In Forex Trading
A skill not to be underestimated
Ever thought to yourself what makes someone greedy? What makes someone want more than what they set out for or what makes them take more than they need? I have. Plenty of times. Maybe even judged them a couple of times. Until I caught myself being greedy. We get greed for different things. And as Forex traders we get greedy to extract the VERY MOST out of the market.
Whether that means trying to catch the wick of the reversal candle to pull out of our buy positions or the wick reversal of our sell positions. Maybe you have never done this and maybe you’ve never felt like doing it, but, I can tell you that many people have. They do not accept what the market is willing to give at a certain point and time in the market and so all their money management principles go right out the window! That is if they even had any to begin with.
For those who do not have a plan, preferably written down and next to you when you are on the charts looking for potential trades, you should make one as soon as possible because without one you may just be putting yourself in the firing line without any protective measures, whatsoever, in place.
Usually, the typical Forex trader will search ‘money management’ on the internet only once they’ve lost a bit of money, if not, blown their accounts several times because at first, it isn’t important to manage your money well, but it’s important to make money consistently, these thought patterns amongst many are very dangerous and unrealistic because to make money consistently you need to know how to look after money correctly. It is similar to wanting a chicken farm that produces eggs consistently for you to use or sell but not knowing how to keep the chickens strong and healthy enough for them to produce the product you essentially want.
When Forex traders Google things like “money management”, “how to manage money in Forex trading” or even more “how to manage money with a small account” they get all sorts of answers. In the beginning, as traders, we may get caught up in the hype because of what is portrayed as the lifestyle of a trader, and if that’s all you’re trying to accomplish then it’s great! But that lifestyle comes at a price.
Money Management is defined as the ability to maximize profits whilst minimizing risks. The more you’re able to do this without allowing greed or fear to cloud your judgment the more likely you are to be a successful trader of the Forex markets and possibly any other market you can think of.
The problem is when we misinterpret that definition to mean we need to be 1 million percent correct about where the market is going to turn bullish or bearish so we can get out of the trades we are in with the most ridiculous amount of pips or money. THAT IS INCORRECT!!
Being objective and not greedy will only serve you greatly in your trading journey! You have got to have a plan that you stick to, so you can remain disciplined in your approach to the markets, and preserve your capital. CAPITAL PRESERVATION AND CAPITAL GROWTH ARE CRUCIAL!! And to those that have searched about managing money with small accounts. I think this is the best place to start because you learn discipline and how to preserve what you have. The mentality on risk: reward is one you cherish and not one you take for granted.
Besides, there are benefits to managing the small accounts correctly. To name a few; they require you to be disciplined in your trading, you aren’t focused on anything else but the highly probable trade setups because you understand the importance of every trade you make, over time you improve spotting your entry points, stop losses (or how you trail your stops) and even how and where you place your take profits in the market, this, therefore, causes less greed and overtime with confidence removes the element of fear, fear of the unknown.
You realize that your skill- set has drastically improved and you’re no longer going to war shooting at everything that looks good, but, rather you’re on the top floor with sniper focus like Jason Bourne waiting for the opportunity to present itself and to capitalize at the right time without leaving a mess to deal with.
Money Management is a process and not a once in a lifetime event. You wake up every day and you plan out how you will manage every single trade, with OBJECTIVITY. Lastly, let’s have a look at what poor money management can do to you even if you have a 90% win strategy.
If trader A risks 2%/trade and looks for a risk to reward ratio of 1:3, with an 4/10 trade win and has a plan to manage the trades through manual stop loss adjustments or through trailing it every 20 pips price moves in their directs. This trader will make 12% in that period because he or she followed a PLAN!
However, if we took the same example with another trader, trader B whose risk fluctuates based on their opinion and zero objectivity or game plan (so he/she risks as follows; 2%, 5, 3, 2, 4, 7, 3, 4, 9 and 3) and so they only win 4/10 by achieving an average of 35% then could still be in a drawdown because of the other 6 trades that didn’t go their way.
You probably think ‘they would have had so much money made, those numbers don’t make sense’ let me show you how they make sense. That would be a total of 42% risked over 10 traders which would mean trader B is now in a 7% drawdown whilst trader A is smiling to the broker looking to withdraw his or her 12% gain. So what’s the lesson??
Money Management brings success, not a strategy. Discipline. Anyone can come up with a strategy but not everyone is willing to manage and so, in the short term they may look like they’re winning but in the long term it’s another trading account being put to the sword.
Happy Money Management!