Use the Right Money Management in Forex Trading
There is no guarantee of success in forex trading even though your forex trading system gives a percentage of opportunities for profits above 50%. Many say that as much as 95% of traders fail, I don’t know whether the number is correct or not. But I once met a trader who had experienced a considerable failure and loss in forex trading. Even if you see the trading system that he uses already is very good.
Then what made him fail?
Bad Money Management. Yes, managing funds that are careless by using large lots makes many traders fail.
Money Management or managing margin funds is the most important part of every trading system. Most forex traders overlook this matter and do not understand the importance of money management.
Manage the right funds in Forex Trading
It is very important for you to understand the concept of managing funds and the decision to use the correct lot. Managing the right funds is to calculate the appropriate lot size in one transaction. In addition to calculating the risk of loss that you will receive if the order loses is the key to this Money Management.
How he can have the confidence that every open position will definitely get a profit. No matter how great the forex trading system you have If you do not manage funds, surely one day you will experience substantial losses in just one open position.
There are many strategies for managing Money Management. The point is how to minimize the risk of each open position. That’s the most important thing.
The term in money management
To organize and make a Money Management strategy, you must understand this term, Equity.
Equity = Fund (your money in the account) – Number of open positions. (This is just a simple formula), If you ;
- look at the simple formula above, we can make a conclusion like this,
- have funds of $ 200 on a trading account and you open 1 position using a margin of $ 20, your equity is still $ 180.
- open a position with a margin of $ 20, your equity will be $ 160.
You still think there are still a lot of $ 160 and intend to open a position again?
We have not calculated the required margin usage, lot and how much leverage is used. I’m sure that $ 160 will disappear in a few days if your position is wrong.
Invest and don’t gamble on forex trading.
If you trade forex without the proper management of funds, it is tantamount to gambling, not investment. You don’t see how your investment funds will last in the long run.
All you know is how much you earn tens or hundreds of dollars in just one trade. Money Management does not only protect margin funds on trading accounts. MM will also provide a very profitable portfolio for your long-term investment goals.
People go to Las Vegas, hoping to win the jackpot in just one night and become rich. We know there are people who get such luck.
The question is how do gambling houses still get money the next day? In the long run, casinos still benefit because they get more money from people who don’t win.
Casino owners are also sure if people who get the jackpot will feel addicted and continue to gamble. The result? Of course “Home Always Win”, in the long run.
Then how do you manage forex trading funds well?
Assume you choose a percentage of risk of 4% of the total funds in a trading account. If your forex funds are $ 100, then the value of 4% of $ 100 is $ 4. So in a maximum trade you only suffer a loss of $ 4. If the position has a loss, then your funds are still $ 96. Not bad. If you use the percentage above, then your forex trading funds will be exhausted if in 25 times your open position has a loss in a row (25 x 4% – 100%).
If we use 2%, then we need 50 times the loss position in succession to finish the funds on the trading account.
Or you can use the total percentage of risk by breaking down in several positions. Example You choose a % of risk of 4%. Within 1 trading day you divide 4% in several positions. For example, you intend to open a trading position in several pairs at once such as USD / JPY and GBP / USD. Then the total margin used in the two pairs is a maximum of 4%, no more.
Compare this one …
If you have $ 100 in forex trading funds and set a 10% profit percentage. Surely in your imagination is how to get 10% from $ 100 or $ 10 in just one trade. If in 10 times you experience a loss in a row, it runs out without remainder.
The bad news is that many of the traders who manage management prefer to use a percentage of margin based on how much they get. Indeed, human nature is greedy, or more concerned about how much he will get and ignore the risk of losing he has.
Remember, Forex Trading is a very appropriate investment for the long term, not a place to get wealth in a short time.