Forex Money Management For Traders
June 24, 2009 by Kelvin
Filed under Forex Tips
To be a successful forex trader, it is important for you to understand forex money management to better optimize your profit. I have some friends who are quite successful in forex trading with winning percentage of only 50%. This means that they make 5 losses and 5 wins for every 10 trades they get into, the reason why they are about to make money is because of their good money management in forex trading.
Here are some factors you must take note if you are serious of becoming a full time trader
1) Adequate Capital: If you have a forex account be it live or demo, you will see that there is a useable margin in the platform window. What this usable margin does for you is to give you a warning of how much more money you can afford to lose before your forex broker stop out all your current positions be it whether you are winning or losing. Once your usable margin hit the zero mark, your forex broker will stop all your position. Therefore I seriously think that you must have a minimum of $10,000 for a standard account, $5,000 for a mini account in order to have a better money management for your account.
2) Risk Reward Ratio: This is another important forex money management you must know which is also the reason why my friends are able to trade profitably even with a 50% winning percentage. Imagine yourself being able to have a risk reward ratio of 3 : 1, your one win is able to withstand 3 consecutive losses. Therefore if you have 5 wins and 5 losses, you are still winning by a huge percentage.
3) Money Withdrawal: It is human nature to withdraw some of your profit to spend on some luxurious items or even pay your bills. However, it is important for you to leave certain percentage of your profit in your account in order to grow it to a size where you are able to trade more lots and make more money. I personally draw 25% of my profit every month to spend and leave the rest to grow my account.
The above are my personal forex money management and I hope that you are able to use them for your trading career too!
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Hi,
I have read through your article and it is really great. However, I seem to have problem in managing the risk/reward part.
For example. I am using a 5 min chart for trading and set both my Take Profit and Stop Loss at 15 pips. If the number of failed trades turns out to be more that the number of success trades, I am facing a loss in the end because the of the number of non-success trades turn out to be more.
On the other hand. If I set my Stop Loss and Take Profit at a ratio of 3:1, this means I am setting my Stop Loss at 5 pips and Take Profit at 15 pips and that means I can withstand 3 failed trades to 1 success trade. However, there are always chances that prices may go against you before it goes back in favor to your trend but due to the setting of Stop Loss. In the end, you don’t get to enjoy the profit but keep suffering the losses as in the prices kept falling to about -7 or -12 pips before it goes back. May I know how are you going to counter such problem? Please advice.
Hi Cedric
Managing risk reward can be a tough issue at times. Personally, I find your stop loss of 15 pips to be too tight and your profit taking of 15 pips to be too small.
This makes it very hard for you to have a good risk reward ratio. If I were you, I will not shorten my stop loss as it is already so tight but I will work to get trades that can provide me with 30 pips profit and this will increase the risk reward ratio to 2:1. You can consider trading breakouts or swings as they usually give very good risk reward ratio.
One thing to note is that if you have decided on a stop loss of 15 pips, you need to add the spread of your currency pair into the decided stop loss and then set it as a target loss.
Example: If the currency pair you are trading has a spread of 4 pips and you are going to trade with a stop loss of 15 pips, you need to set your stop loss level at 15 + 4 pips. If not, your stop loss is only 11 pips after subtracting out the spread.
Correct me if I am wrong. It sounds to me that you are a scalping trader as you are working on the 5 minutes chart with a small profit target. Most of the time, scalping the forex market can’t really gives you a good risk reward ratio.
A scalper has to rely on the winning percentage to make money while a day trader can rely on both the winning percentage and the risk reward ratio to make money.
My suggestion for you is to learn how to trade breakouts or swing trading as additional strategies in your trading kit.
In this way, you can scalp the market as well as trading trades that gives you high risk reward ratio too.
All the best to your trading!
Great Articles, Accurate, I have used your techniques and found them the to be excellent….thanks a million ( :
I am glad that you find them useful.