Three Rules of Money Management in Forex Trading
Many say that the trading system is not very necessary – it is necessary but it is precisely the psychological aspect that determines the trader is successful or not successful. Although this opinion is true if it is associated with the discipline attached to the rules of the trading system, there is also an important factor as a determinant of profitable successful traders. Important factors are money management and the ability to protect trading capital and ensure trading accounts move in the right direction for the long term.
Money management has three main rules and if done will increase the chances of becoming a consistent profit trader, regardless of the trading system used. Although useful to have a perfect trading system, but the fact is all traders lose, whatever trading system they use.
As the first step to limit losses is that any trades performed must have a loss restriction rule. Ideally no more than 2% of all capital in the account. Yes, although it looks very small amount of risk in any trading, it will be useful for professional traders to follow this rule so they can absorb possible losing trades in a row. For small forex trading accounts, traders will be easily tempted to risk between 20% – 50% for each position. So this will easily drain the funds in the trading account if the trading system used fails in one trade.
The second step of good money management is to apply the RRR for each trading position. Ideally is trading with RRR 1: 2. This ratio allows the trading system used to lose several times but the overall condition will remain profitable. This 1: 2 ratio means risking some funds from a potential loss that is less than the profit potential of a trading profit. With this strong ratio the amount of profitable trading does not need more than the number of losers traded.
The third step is the use of stop loss as a tool to reduce losses. Unfortunately, it is difficult for a trader to be able to admit or accept his losing trades. The use of stop loss is useful to ensure that the bad trading position is closed as quickly as possible. One of the most effective is to use an automatic stop loss that can be placed in the market when the trading position is opened.
Stop loss can act as a safety net against large market movements and limit losses at any losing trading positions at pre-determined levels. Although stop loss does not guarantee closing the position at the desired price when there is a rapid price movement, its use can avoid the temptation of “wait and see” and expect the price to be back in the direction of the initial trading.