5 Money Management Techniques For Forex Traders
Trading is most definitely a game of numbers which requires money management. The latter is the most important part of any trading plan as it would help you establish how much money you should be able to earn. Having a good money management plan in place will help you move away from single-digit returns and help make the kind of profit you should be making! Enrol here for ib registration
Investing your hard-earned money in the forex market doesn’t involve only wealth management but also money management. Typically, money management refers to the ability to handle your funds in an efficient way. But when taken into account in the forex market, it could be interpreted differently. Knowing money management rules in trading could help you get better in the game.
What is money management?
Money management refers to a planned strategy aimed to boost or cut down your position size to curtail risk as you look to achieve the highest possible growth from a trading account. Money management can be implemented in many ways but the good way of doing so is to emphasize both the risk and reward factors. This would let you leverage the account while also keeping the risk in check. Money management could be useful in most financial markets as it focuses only on account performance.
What type of trader are you?
Before you pick a money management strategy that suits you, determine the kind of trader you are. Everyone has different trading goals and needs so they’d not have the exact same personality as you. Trading has a lot to do with individual psychology and thus, you should be choosing an approach that’s in harmony with your personality.
Do you think you’re a conservative trader who doesn’t want to take a lot of risks and is looking at stable gains? Or, do you feel you can be an aggressive trader with a high-risk appetite? These are some factors that will help you choose the money management that suits you. At the end of the day one thing is clear: the more risk you take, the higher your potential return.
Why is money management important?
Money management becomes necessary as it helps you pick a strict path that you can steadily tread on to achieve your trading goals. An aggressive trading strategy will help you earn big when your predictions are right but when you’re wrong, you should know that there’s a risk of losing more. On the other hand, being too conservative would also make it hard for you to make up for the trading costs or meet your targets. An independent trader needs to aim at earning as much as possible while ensuring that you’re not emptying your account.
5 money management strategies for traders
Traders can implement a number of money management rules in trading such as:
- The 2% Rule Method
The 2% Rule refers to an anti-martingale money management method that operates on the basis of your account size.
Risk per Trade = Account Balance X 2%
To use the 2% rule, take the help of a position size calculator which is user-friendly and will spell out the size of your position for every trade in some clicks.
A conservative approach, it emphasizes cutting down risk, making it a great method for new traders. It would help you stay in the game as you learn and become confident in your moves. This method is also suitable for accounts worth over $1 million as big accounts need not risk so much to earn acceptable returns.
Do remember that this method is not growth-orientated and can prove to be hard to use in certain leveraged markets. Traders who have smaller accounts are more open to risks to be able to earn more.
- Fixed Fractional Method
A fixed fractional method is popularly used to trade a contract for every X amount of dollars in the account. X could be either a large or small number.
X = $10,000; If Account Balance = $20,000, then Position Size = 2 contract
To use this methodology, you need to trade a contract and as soon as your account reaches $30,000, you could raise your position size to 2 contracts and keep going.
In case X is too large, the growth becomes slow but the method becomes a low-risk one. Whereas if X is very small, there can be quicker growth but the chances of massive losses are also lost.
Fixed ratio method
The fixed ratio method has a lot in common with the fixed fractional method. As per this, you need to first buy a stock. Buy more shares when the stock reaches a predetermined level of profit. When the stock earns twice the amount of preset profit, you can buy another set of shares and keep repeating this cycle until you’d like to stop.
Optimal F method
The optimal F method depends on your past performance to determine the size of your position size. What you need to do in this case is, assess all the trades you earned a profit on and then calculate the average. This could be your base for the trades you take up in the future.
Secure F method
The secure F method is among the most practical money management rules in trading. An advanced version of the optimal F method, the secure F method requires establishing the position size which brought you the highest amount of gains on your previous trades. When the position size is established, it can be used on upcoming trades.
When should money management be implemented?
When you have established that your strategy has an edge and you would be able to trade with it steadily, you can take a look at money management. It would be useful in helping you be focused and become a successful trader in gold rate dubai uae.
Money management is more about common sense and understanding the basics. It’s not some rocket science that you need to wrap your head around. You should know what your trading plan should bring you and your plan needs to be well-aligned with your trading persona.