Money management techniques forex market

Money Management Styles Generally speaking, there are two ways to practice successful money management. A trader can take many frequent small stops and try to harvest profits from the few large winning trades, or a trader can choose to go for many small squirrel-like gains and take infrequent but large stops in the hope the many small profits will outweigh the few large losses.

The first method generates many minor instances of psychological pain, but it produces a few major moments of ecstasy. On the other hand, the second strategy offers many minor instances of joy, but at the expense of experiencing a few very nasty psychological hits. With this wide-stop approach, it is not unusual to lose a week or even a month's worth of profits in one or two trades. To a large extent, the method you choose depends on your personality; it is part of the process of discovery for each trader.

One of the great benefits of the forex market is that it can accommodate both styles equally, without any additional cost to the retail trader. Since forex is a spread -based market, the cost of each transaction is the same, regardless of the size of any given trader's position. This cost will be uniform, in percentage terms, whether the trader wants to deal in unit lots or one million-unit lots of the currency.

This type of variability makes it very hard for smaller traders in the equity market to scale into positions, as commissions heavily skew costs against them. However, forex traders have the benefit of uniform pricing and can practice any style of money management they choose without concern about variable transaction costs. Four Types of Stops Once you are ready to trade with a serious approach to money management and the proper amount of capital is allocated to your account, there are four types of stops you may consider.

Equity Stop — This is the simplest of all stops. The trader risks only a predetermined amount of their account on a single trade. One strong criticism of the equity stop is that it places an arbitrary exit point on a trader's position. The trade is liquidated not as a result of a logical response to the price action of the marketplace, but rather to satisfy the trader's internal risk controls.

Chart Stop - Technical analysis can generate thousands of possible stops, driven by the price action of the charts or by various technical indicator signals. Technically oriented traders like to combine these exit points with standard equity stop rules to formulate charts stops.

Figure 2. Volatility Stop - A more sophisticated version of the chart stop uses volatility instead of price action to set risk parameters. The idea is that in a high volatility environment, when prices traverse wide ranges, the trader needs to adapt to the present conditions and allow the position more room for risk to avoid being stopped out by intra-market noise.

The opposite holds true for a low volatility environment, in which risk parameters would need to be compressed. In Figure 3 the volatility stop also allows the trader to use a scale-in approach to achieve a better "blended" price and a faster break even point. Figure 3. Figure 4. Well, we are in the business of making money, and in order to make money, we have to learn how to manage risk potential losses. Ironically, this is one of the most overlooked areas in trading.

Many forex traders are just anxious to get right into trading with no regard for their total account size. When you trade without risk management rules, you are in fact…. You are not looking at the long-term return on your investment. So how in the world are casinos still making money if many individuals are winning jackpots? The truth is that casinos are just very rich statisticians. They know that in the long run, they will be the ones making the money—not the gamblers.

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