Forex Money Management: Formulas and Examples of the Easiest Use
Forex money management is one of the important factors in trading success. Because with good financial management, a trader will have a greater chance of consistently making profits.
Therefore, after reading this article, you are expected to be able to master the theory well, especially the formulas and examples of their use.
“Before speaking further, I need to emphasize here that what I have demonstrated is not an absolute way to follow. But at least you understand how to manage your finances well so that your account remains safe. You can combine this theory yourself according to your trading system. use.”
Are you able to bear all the risks in the forex business?
If yes, then please read this article to the end because you will find the benefits of extraordinary financial management in forex trading.
Are you ready?
Okay friends, at this time I assume that you are still reading this article and I assume you are ready to face all the risks in the forex business. If you have a business spirit, then I believe that feeling of fear is very small or almost non-existent because every business has risks.
However, even so, we have to find ways so that the risk value has a smaller percentage than the reward/profit value so that our business can run smoothly and have profits. You need to know that there are special steps we can take to avoid major dangers in forex trading. One of them is by managing finances such as the stop loss value. Because the stop loss is the exact number that we will bear when the price moves not according to the prediction. Talking about risk, most traders must have experienced losses.But it becomes unnatural if you already know about the risks but still ignores the signs that have been explained in this article. If you don’t believe it, please ask friends or hear complaints on forums about how they experience margin calls because of their own mistakes. They do not want to use the financial system properly. Of course, this is very unfortunate! They waste money in vain.
Because of what?
Because usually, beginners fall at this stage. They do not understand the three main things in forex trading. I will continue to convey this warning so that you do not experience losses like what they felt. But if you want to feel how bitter a margin call is, just try trading without paying attention to these three things.
You can experience severe trauma and even leave this business if you are not mentally strong enough to bear big losses. Usually, people who fail in the forex business will blame the business by saying forex is a gambling arena or chancy. So that failure does not happen to you then pay attention to these three factors. Simply put, in forex trading, three main points greatly influence success, namely: Trading System, Money Management, and Psychology. These three things are the main keys to success in the long run and all three must work without a single point being overlooked.
However, for this discussion, we will focus first on financial management because it is easier to understand and can be learned by reading this article several times.
In forex trading, there are many very interesting things for us to learn. One of them is “Forex Money Management”.
Interesting because there is a lot of knowledge that continues to grow, so it provokes us to continue to learn new tips and tricks in forex trading to get consistent results.
Even after you read this article and practice forex trading, you may find new knowledge that is not included in the material discussed this time.
Okay friends, before we discuss the formulas and examples of using simple trading financial management to create consistent profits, let us first know what it means.
What is Forex Money Management
Understanding Forex Money Management is a personal rule that is made to increase the probability value or profit opportunity consistently for a certain period.
But even though they are different, there is one basic rule that is the same and becomes the core of financial management, namely “the value of profit must be equal to or greater than the value of risk”.
This setting is not only limited to placing stop-loss points and profit targets. But further into how to measure the resilience of an account to withstand waves of unpredictable price movements.
Usually, the risk level used is 2% of the total balance owed. Why 2%? Because a loss of that magnitude is still considered reasonable and easy to recover when compared to a loss rate of greater than 2%.
In addition, the price movement with a risk level range of 2% is considered more optimal than some of the experiences of professional traders.
Will placing a maximum risk limit of 2% of the account guarantee success in forex trading?
Once again, keep in mind that financial management is a personal rule that involves the level of anxiety of each trader. Therefore, only the traders themselves can optimally determine the maximum amount of risk they can take without disturbing psychology. But with the support of the right trading system and psychology, then by providing a risk level of 2% of the total account will provide a greater possibility for consistent profits in the long term.
Does financial management always involve stop loss and profit targets?
There are times when stop loss and profit targets will limit the space and breath for movement to get to the desired target. Therefore it is necessary or not to include stop loss and profit targets in forex trading, depending on the trading system you use.
The involvement of the trading system cannot be separated from money management as I said earlier that the 3 main things in trading cannot run alone. All must be used in harmony.
For more details, I will give some examples of forex financial management which are not only limited to stop loss and profit targets. But it all depends on the trading system used.
Therefore, keep reading this article carefully so as not to lose the point I mean.
Formulas and Examples of Using Forex Money Management
In this discussion, we will learn about examples of usage and formulas for forex financial management. You need to know that there is no absolute formula in forex financial management. Because it all depends on the trading system and the psychology of the trader himself. But behind its flexible nature, the application of money management has the same goal, namely to increase the probability of profit in forex trading so that the account continues to grow in the long term.
This method is usually done by setting the level of risk and reward when opening a position.
In particular, there is no standard formula for calculating it, but it can simply be described that when we set the risk value to be smaller than the reward value, in the long term the possibility of the account developing positively is greater than no regulation at all. The value of the comparison between risk and reward cannot be applied exactly to every trading action or open position.
This is because market conditions are always changing and each currency pair has its character or characteristics. Therefore, as I said earlier, there is no standard formula that applies, so there is no special form or method of financial management.
However, because our goal was to increase the value of the probability of the value of the ratio of risk and reward that we can apply in trading is 1: 1, 1: 2, or 1: 3
initial steps to implement financial management is to determine the percentage of losses that could we bear in every open position.
Our account value is $1000, the amount of risk that we can consciously accept (not disturbing psychology) is 2% of the capital, then the value of the risk is $20.
To determine the amount of risk and reward yourself, in Metatrader 4 or 5 there are stop-loss facilities and profit targets. By placing the stop loss value smaller than or equal to the profit target value, we have made forex money management settings.
So the main purpose of doing this is to open up more secure and consistent profit opportunities compared to conditions where there is no risk and reward control system at all.
The next question is whether it always guarantees the account will develop well?
Use in Averaging and Hedging Systems
As at the beginning of the discussion, forex money management is not only about stopping losses and profit targets but how to apply them according to the trading system used.
It often happens in trading that the price is first hit by a stop loss even though after that the price turns back and moves according to the prediction. This sometimes causes disappointment because we should have made a profit. After all, the price managed to touch the profit target point that had been determined from the start.
Hedging is also part of financial management because it limits the value of risk by opening opposite positions. But how to stay in control in the forex financial management system.That’s what I will demonstrate in this article. Therefore, keep reading this article to the end carefully because you will find extraordinary new things. Some so many traders consider averaging and hedging as a way of revenge or slaughter as if the price can be conquered. Usually, the result is that they over-trade or open excessive positions, thus giving a very large risk to the account. The worst risk impact is a “margin call” so that the capital runs out and is frustrating.
What is Averaging?
In forex trading, there is the term Averaging, which is a trick by opening the same position when the price moves opposite to the initial open position. This action is carried out in the hope that prices will move back according to plan. For application to the averaging system, we can do it directly or by way of pending orders.
As an illustration, to make it easier to understand, let’s look at the table below:
From table 4 above, we can understand that the initial position is number 1, namely buying for 0.7880 and the price drops to 0.7840 (all using SL 0.7830 and TP 0.7930).
From this case, if all of the 5 open positions mentioned above have been lost, then the level of risk we take is $18 or about 2% of our account value, which is $1000 as shown.
However, if there is a profit, we will get $42 or the equivalent of 2 times the level of risk that we are risking.
The advantages of this averaging technique compared to only doing 1 open position with a larger lot are as follows:
If we only do 1 open position with an initial price of 0.7880 and SL 0.7830 and TP 0.7930 then to reach a risk level of $20 we must use 0.04 lots. With a 1:1 risk level, the reward we can expect is only $20.
However, if we do average with the same risk level of $18 as in the example table 3 above, then the reward value we can expect is $42 or equivalent to 1:2 risk and reward.
Bigger results compared to only doing a 1-time open position with a larger lot size.
To assist the calculation in determining the stop loss and profit target, we can use a calculator tool or an excel program to make it faster and easier.
What is Hedging?
As an initial note that the level of risk that we can bear is 2% of the balance of $ 1000 which is $ 20. If we use a lot of 0.02 then the number of pips needed to reach the risk value is 100 pips. So the hedging technique that can be done is to open a position that is opposite to the initial position when the price has moved half of the maximum risk limit of 50 pips. In this case, there is no need for stop loss and profit targets while hedging is still running because we will wait for the price to move until a strong support or resistance point.Why open the opposite position when it reaches 50 pips? Because we will use the remaining 50 pips to put a stop loss when it reaches a strong resistance or support point. But indeed this technique is more complicated for beginners.
However, for those who already know how to read charts and know areas of strong support and resistance, this method is quite easy and effective when facing strong and unpredictable movements.
Don’t you understand?
So the total risk borne is -$20 according to the initial money management which is 2% of the total account.
Important Notes For Averaging and Hedging Systems.
Although this looks easy, in real trading it will be complicated because it involves psychology and intelligence in reading opportunities.
Therefore, here are important notes when using averaging and hedging systems.
When using the Averaging system.
This method is done with the system opening the same position in one open position.
So if you are not observant it will give you a big risk. However, with the money management system that has been described earlier, the risks to be faced can be controlled. The Averaging method is very effective if the price is already in a strong support or resistance area. For example, if we want to SELL, the price must be in a strong resistance area so that the price will likely fall more. Likewise, if you want to buy, you have to wait for the price to be in a strong support area so that the possibility of the price going up will be greater.
When using the Hedging system.
There are times when you open a position, the price moves mines deeper. This usually happens because the price is in the middle position between strong support and strong resistance so the price is difficult to predict. The thing that can be done is with a hedging system to lock in losses and wait for the price to touch strong support or resistance area.
This area of strong support and resistance can usually be seen on large time frames such as H4 or D1. How to read strong support and resistance in trading I will discuss in the next article. In essence, this technique is used when the price position is between support and resistance and there are some very strong fundamental effects.
It’s not easy, but by practicing and observing the news and charts you will be able to spot these opportunities. Okay, friends, that was an illustration of how we apply financial management in forex trading. By applying it neatly and strictly, the probability value or the possibility of our account to grow will be greater, in addition to limiting the level of risk, it will help reduce psychological pressure in trading.