Trading
in Forex is as much about losing money as about making money. Risks in
Forex refers to the possibility of losing entire investment while
trading. Trading Forex is known as one of the riskiest capital
investments. In Forex traders always search for the most efficient ways
to limit risks or at least lessen risk effects. For this purpose
various risk management and money management strategies are created.
It
is impossible to avoid risks in Forex trading. In order to limit risks
traders use methods of setting protective stops, trailing stops; use
hedging techniques, study scalping strategies, look for the best deals
on spreads among brokers etc.
Traders with the best risk management strategy earn the largest profits in Forex.
Money
management system is a one kind of forex trading plan which controls
how much you risk when you get an entry signal from your forex trading
system. One of the best money management methods used by many
professional forex traders is to always risk a fixed percentage of your
equity (e.g. 2%) per position.
Money
management in Forex trading is one of the most important problems of
new and even advanced forex traders. Almost everybody can find a good
trading system that can be profitable but something that causes traders
to lose. Lacking of a proper money management strategy and discipline,
many forex traders lose money in their trading. Although money
management is so important and critical, it is still very easy to
follow. Forex money management have several different aspects and stages
and should be started from the very first stages of your live forex
trading business which is opening your live trading account.
Here is an example of bad effect of high and low trade. High and Low trade influences a lot in forex trading.
Trades
|
Account Balance
|
Risking 2% of total account per trade
|
Trades
|
Account Balance
|
Risking 10% of total account per trade
| |
1
|
Start-5000
|
100
|
1
|
Start-5000
|
500
| |
2
|
4900
|
98
|
2
|
4500
|
450
| |
3
|
4802
|
96
|
3
|
4050
|
405
| |
4
|
4706
|
94
|
4
|
3645
|
364
| |
5
|
4612
|
92
|
5
|
3281
|
328
| |
6
|
4520
|
90
|
6
|
2953
|
295
| |
7
|
4430
|
89
|
7
|
2658
|
265
| |
8
|
4341
|
87
|
8
|
2392
|
239
| |
9
|
4254
|
85
|
9
|
2153
|
215
| |
10
|
4169-17% of the account has been lost
|
10
|
1938-over 60% of the account has been lost
| |||
It
is clear that there is a great difference between 2% and 10 % risk. If
you take 2% risk, you will lose 17% of your capital. If you take 10%
risk, you will lose over 60% of your capital. From this chart, it is
clear that money management is very essential in forex market.
Money Recovering
It
is very hard to recover the lose amount, if any trader loses some money
from account. If you lose 50% of your account, you have to profit 100%
of your new trade to recover your money.So money management is so
important in forex market. Now I will show you how easy it is to
calculate your position size. Lets say you have a $10,000 account and
you have found a trade setup with EUR-USD which has to have a 100 pips
stop loss. This 100 pips stop loss should equal to 2% of your capital,
based on money management rule that says you should not risk more than
2% of your capital in each trade.
2% of $10,000 is $200:
$10,000 x 0.02 = $200
Now tell me if 100 pips should equal to $200, what value each pip should have? That is right. Each pip should equal to $2:
$200 / 100 pips = $2
So
to risk only 2% of your money in this trade, your position size (the
amount of money that you trade) should be chosen in the way that each
pip equals $2.
Now the question is how much EUR-USD you should trade if you want each pip to equal $2.
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