Close Watch On Money Management In Forex Trading

Almost every forex trader knows that money management is a very important aspect for obtaining a profitable trading results. Money management must be applied each time will open position trading. If we examine, there are several myths in money management that are believed by many forex traders but not entirely true.
Let us look at the myths:

Myth 1: in setting the risk, traders should focus on the magnitude of the pip

Often we find the trader determines the risks and target profit in pips, rather than in the value of his money. The basic rationale is to not involve money value in the calculation of the profit or loss that the trader could prevent the involvement of his emotions in trading. Instead the professional traders to calculate risk and target profit in money because they know that because the main goal is gaining profit trading forex real value in money, then psychologically risk and reward him must be specified in the value of money, not the size of pip. Because forex trading for them is a business, and every trade was a transaction then determines risk in pips less relevant. Thus a great risk in the pip does not mean the risk to capital is also great.

Myth 2: Risk 1% or 2% of the capital is pretty good

Even though it is relative and depends on the size of the balance of the respective trader, but it is a big risk that determine the flexible and is not necessarily pegged in the percentage of capital is more effective. This can be seen in the example of the comparison to determine the risk to capital and profit/loss percentage below.

Myth 3: a huge Stop loss has a lot more risk

Many traders think that by setting a stop loss in pips are great value for money in their risks are also great and vice versa. Psychologically such opinions may have a point, but if they understand the concept of defining large lot size (position sizing), then the myth that clearly is not true. Position sizing is the concept to determine the magnitude of the trading lot (lot size or volume) that is adapted to the size of the stop loss is desired. For example if a big risk for a trading position set $ 200, and the big 100 pip stop loss, then the size of the trading lot is 2 mini-lot, i.e. $ 2 per pip ($ 2 per pip X 100 pips = $ 200). But if we do not adjust the size of the lot size and only focus on the magnitude of the stop loss that we specify, the myth is true. Example: a trader A and B are both trading in 5 mini-lot or $ 5 per pip, traders determine A stop loss of 50 pips and trader B amounting to 200 pips, if indeed berlawana market conditions with their predictions and the stop loss the trader A and B are equally subject to the trader, A loss of $ 5 X 50 pips = $ 250 are trader B loss of $ 5 X 200 pips = $ 1000. So in order to apply the correct money management in forex trading, the trader should understand the concept of position size it properly.

The power of risk/reward ratio

Professional traders always focus on the risk/reward ratio on any position opened, either single or multiple position position, with a realistic profit target. They have to understand that forex trading is a game of probability and the competence of the managing capital (capital management). A lot of newbies who ignore this risk/reward calculation and plain with only determine a large stop loss but did not set a target profit until the price movement turned against the predictions of the position that has been opened. Risk/reward ratio must be determined in order to obtain complete profit/loss percentage (winning percentage/loss percentage) that is evident in the overall trade.

Example comparison of determining the risk to capital

For example, trader 1 determine the risk of 2% of the capital, and 2 determine risk trader in a certain amount. Each balance is $ 5000, and the frequency of trade four times with the risk/reward ratio = 1: 3. The same profit/loss percentage is 50%.

Trader 1:

risk = 2% X $ 5000 = $ 100

Trade 1 loss = $ 5000-$ 100 = $ 4900

Trade 2 loss = $ 4900-$ 98 = $ 4802

Trade profit = $ 3 + $ 288 4802 = $ 5090

Trade 4 profit = $ 5090 + $ 305 = $ 5395

Trader 2:

assign risk fixed for $ 200

Trade 1 loss = $ 5000-$ 200 = $ 4800

Trade 2 loss = $ 4800-$ 200 = $ 4600

Trade 3 profit = $ 4600 + $ 600 = $ 5200

Trade 4 profit = $ 5200 + $ 600 = $ 5800

From the example above, it seems that after a drawdown (amount of losses as a result of successive losses) and percentage of profit and loss are the same, then the end result a trader 2 is better than 1 trader, and also for example occurs with a frequency of drawdown of the larger trade trader 2 will be faster in recovery at least to breakeven (turnover).

From the discussion and examples above it can be concluded that by applying money managent is right and should not be fixated on the myth, sooner or later results in a consistent and profitable trading could certainly achieved.

Posted by Unknown on Monday, February 2, 2015 - Rating: 4.5

Title : Close Watch On Money Management In Forex Trading
Description : Almost every forex trader knows that money management is a very important aspect for obtaining a profitable trading results. Money managemen...

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