Forex Money Management Embracing losses leads to success

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Forex Money Management: Embracing losses leads to success

What is your idea of a successful trader? Is it the one whose number of profits is bigger than the number of losses? Most people believe that to be seen as a “successful trader” you must turn into profit seven, eight or even nine out of ten trades. Is it the case, indeed? What if the opposite is true? Let’s take a look at what is known as the risk reward ratio, indicating the proportion of profits and losses.

What is the risk reward ratio?

If you open a trade with a stop loss of 20 pips and take profit set also at 20 pips your risk-reward ratio will be 1 to 1. By the way, we have already discussed RRR in our article How to set RRR, SL and TP. If you read the article or know RRR from other resources we recommend you stick to the 1 to 1 ratio. However, is 1 to 1 really a barrier that should not be exceeded?

John Murphy and Michael R. Rosenberg have written a few books about technical analyzing and published results of well-known trading strategies using moving averages, RSI, MACD and others What was their conclusion? The majority of correctly set strategies (set based on the instrument’s volatility) using the ratio of 1 to 1 lead to success in at least 50 percent of all trades.

If we change RRR in our favor toward taking profit i.e. risk of 10 and profit (reward) of 20 pips our success will diminish and we will generate profit in 2 or 3 instead of 5 or 6 out of 10 trades. We must anticipate this and don’t think that by increasing RRR and extending take profit we will automatically generate profit in 50% of trades. Remember: To correctly set the time of closing a trade is equally important as the time of opening it.

RRR of 1 to 1 is, to a large extent, a psychological barrier. It’s because the bigger the take profit vs. stop loss ratio, the less successful the trading strategy.

How to profit from a loss

Paradoxically, a loss might be the driver to a future profit. If your trading strategy is successful at 50% and your RRR is 1 to 1 you need to turn at least half of your trades into profit to reach the break-even point. With RRR of 1 to 2 it is all different. 11 profits (i.e. 19 losses) out of the total of 30 trades are enough to get into black numbers.

You may argue that all we change is stop loss and take profit, affecting RRR (total success rate), but the trading strategy remains the same. You are right, we leave the strategy untouched but significantly influence its results. Try it out, at least on a demo account and some historical data. You will see that a bigger percentage of losses may eventually drive you to profit.

Forex trading, as well as trading other instruments, is, to a large extent, affected by psychology. Most traders simply don’t feel good when losing 19 out of 30 trades. Sometimes even unpleasant experiences are a path to success. Nevertheless, will the success rate change with the change of RRR? How to prevent it?

Further articles focused on money management


More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn’t very successfull with dropshipping on Amazon and other ways of making money online, and I’d only earn a few hundreds of dollars in years. But then binary options caught my attention with it’s simplicity. Now I’m glad it did because it really is worth it. More posts by this author

Money Management in Forex: Learn and Grow Your Account

In this blog post, We will share with you the importance of Money Management in Forex. If you apply these money management techniques, you will take your account to the next level.

Trading requires a lot of patience, proper training, quick adaptation to market updates and a number of other qualities.

Succeeding in trading also requires great rigor and a foolproof organization.

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Among the risk management tools that allow the trader to avoid mistakes and safeguard his capital, comes first money management.

It goes without saying that Forex trading is a risky business and that there are a lot of traders who are not winners.

However, there are many tips that can improve your trading performance.

The financial health of the trader is measured by the way he can manage his trading capital.

Money management in Forex helps you determine your risks in advance, develop and improve discipline and take your trading to the next level.

Incorporating these money management tips for Forex trading into a comprehensive strategy will help you protect your portfolio. The most Successful or Richest Forex Traders use these techniques.

Unfortunately, the experience is the way the majority of novice traders learn. It is best to learn these risk management principles and avoid making these mistakes.

Although none of these Forex money management tips are a guarantee against losses, they can always reduce them.

We will Learn

  1. What is Money Management?
  2. Money Management in Forex Trading – Try Demo
  3. Using Money Management Trading Software
  4. Manage Stress in Trading
  5. Trading Management – Use Stop Loss
  6. Manage Emotions in Trading
  7. Trading Plan With Money Management Strategy Forex
  8. Understand the Risks Without Forex Money Management System
  9. Consult Forex Forums
  10. Avoid Being Greedy
  11. How to Apply Trader Money Management
  12. Calculate Maximum Loss
  13. Money Management Forex Excel

Let’s now check out the money management tips most practiced by professional traders. These forex trading tips appear in random order and are also important.

Check out these tips and try to implement them in your trading strategy.

Today we will tell you more about money management and how important it is to make long-term gains.

What many traders fail to realize is that you must not only make short-term gains but also know how to perpetuate them in the long run.

Having long-term gains is possible thanks to money management in forex.

1. What is Money Management?

Money management is an English term that simply means money management.

It is a term used in the world of finance and especially in online investment to designate the management of risks related to investment.

Money management is your ability to manage your earnings and your investment so you do not take risks outside of your trading strategy.

The reason many traders lose money in Forex trading is because of their lack of knowledge and experience, which leads to the disregard of the principles of money management in their trading plan.

Therefore, money trading management is a success factor that cannot be negotiated even for a novice and experienced traders.

Below we will talk more about money management in forex trading forex beginners, before switching to a description of money management for advanced traders.

We will complete the article by summarizing the methodology in a series of short suggestions on the money management stock market.

A good trader has a good investment strategy and a good money management tool. Managing your capital is there to help you make more money without taking more risks.

Here are some money management techniques in forex trading:

2. Money Management in Forex Trading – Try Demo

If you have just started trading online, you will need to train yourself. Forex trading as in any activity, can not be done without trader training.

We advise you to test the investment on a demo account first. Trading in the demo will allow you to set up a trading strategy, to avoid the mistakes of novice traders and especially to set up good money management.

When you feel that you have learned enough, you can start trading by investing money that you allow yourself to lose.

The loss is inevitable in the currency investment and you have to get used to that.

A basic principle of money management is not to put all your eggs in one basket. You must diversify your investments.

The principles of money management forex are easy to follow and risk management can save you a lot of money and above all to avoid losing money.

3. Using Money Management Trading Software

The trading platforms of professional traders offer money management utilities. This kind of tool helps you to better manage the risk and your exposure in the market.

Different Forex brokers offer Expert Advisors like Trade Terminal and Mini Terminal that are part of MetaTrader and which allow you to:

  • Place orders on hold
  • Save order templates
  • Close trading orders at once
  • Set up trading alerts
  • Make lists of market orders
  • Automatically close orders

4. Manage Stress in Trading

Trade only with the money you can afford to lose.

You never want to use the money you need to live. Forex trading is a risky investment and you should use only the money you allow yourself to lose in this type of investment.

This will help you reduce stress and avoid the fear of ruin, which will drive you to error.

5. Trading Management – Use Stop Loss

There are very few disadvantages when it comes to setting up a stop loss. The stop loss helps to better manage his feelings and puts a little order in the exit points of the trading positions.

Setting up a stop loss makes it possible to not lose more than a known amount in advance. You should set up a loss-loss ratio and put the stop loss according to that.

You probably can not trade without a stop loss. An interesting alternative is to use stop-loss followers on your MT4 platform.

Because the currency market is an exchange rate, many CFD brokers offer significant leverage effects to their customers. Leverage amplifies gains and losses.

It is not advisable to use a large leverage effect when you want to set up a trading risk management system.

The most important trick in Forex trading is to quickly cut losses and let your earnings run. We add positions if we have winning positions and we cut the losing positions before they are too important.

If you are a beginner, avoid significant leverage. We can only use leverage when we are used to losing money and we know that not all stock market orders can be winners.

So you will not suffer major losses in your portfolio – and you can avoid being on the wrong side of the market.

Leverage is one of the advantages of the currency market. It can help you earn more, but it can also work against you. We recommend caution.

6. Manage Emotions in Trading

Forex trading can bring a host of emotions, excitement, and frustration. Unlocking your mind from your emotional bias can help you make rational decisions.

Making decisions based on your emotions is the safest way to lose money. Emotions can influence you to make a lot of bad decisions while trusting your reason can save you losses.

When trading forex online, the trader can face a lot of obstacles with a lack of knowledge. These first five currency money management tips will provide you with the best insights and potential pitfalls you are likely to face.

Forex traders have to accept that their orders can bring profits and losses. It’s good to think that we will make gains with trading, but to expect only gains is not reasonable.

A winning trader is realistic and prepared for any outcome, giving his best effort at all times.

The psychology of trading is very important in manual trading because it is a human who will make the buying and selling decision.

The best money management strategies forex avoids stress and we have an investment plan established in advance. Try to do the same.

Accepting a loss is very difficult and beginners will always want to rebuild after a loss. This is the most dangerous thing in trading.

For example, you lose $ 2,00 by investing $ 1,000.

The percentage loss is 20%. So to cover the loss, you have to get a 20% gain to get back to the original amount.

After a loss, the most important thing is not to try to rebuild, because very often you are not in good shape psychologically and it can make you lose even more.

7. Trading Plan With Money Management Strategy Forex

You must have a trading plan and stick to your investment strategy. Your trading plan must include a risk management system or forex money management.

With an investment plan, you need to know your entry and exit points and you need to know when to take your winnings or cut your losses.

This limits the risk of big losses and makes it difficult to lose all your money on a series of losses (with a risk limited to 1% of the capital per trade, it takes a series of 100 losses to consume all the money deposited).

We quickly understand that with the capital of 1000$ for example, this rule limits the loss to only 10$ per position, which may cause you to close too prematurely positions.

The more capital available, the more money management will be facilitated and more efficient.

To counter this limit, the trader has no choice but to relax somewhat the constraints (mathematics but no behavior) of money management, and take a little more risk if he wants to record more interesting gains.

8. Understand the Risks Without Forex Money Management System

It must be recognized that there is an element of risk in each Forex market position and accept the fact that it is possible to lose money on any order.

We must not think in absolute terms. In investing, one must always think in terms of performance. If you make a 10% return it is already huge, especially if you do not take a lot of risks.

When you enter a position, you have to weigh the pros and cons, the gain versus the potential risk. That’s why we often talk about a 1: 3 loss ratio.

Your stop loss and take profits must be put in accordance with the rules of money management.

Always weigh the risk for each trade before thinking about the potential profit.

It’s better to make small, solid gains than big trading gains. Entering the market with the mentality of a poker player is a sure way to lose money.

Before you start trading, look at the size of your position. The size of the position will directly influence your investment risks and potential losses.

The size of the position must match your capital. Very often, traders will take a maximum of 1% to 3% of their capital on a Forex market position, not to put all their eggs in one basket.

The worst thing in terms of risk management is to borrow to invest in the Forex market. Doing this will guarantee a certain loss, you will be stressed and patience will be missed.

9. Consult Forex Forums

When trading forex, it is useful to consult forex forums and to be in contact with other traders to keep up to date with the feeling of the market.

A Forex trader must always follow market news and techniques that other investors use to have a winning trading strategy.

10. Avoid Being Greedy

Avoid being greedy in trading. Trading is not about winning every time and making great trades at any time.

It’s about opening market orders at the right time – and closing them at the right time. One mistake not to make is to want to take the winnings too fast, for fear of being a loser.

Good money management in Forex is always associated with great discipline and the existence of a forex strategy and a trading plan.

To test your capabilities in online investing and the MetaTrader platform, open a demo account.

11. How to Apply Trader Money Management

It is easy to access online trading training and learn money management with the intention of using it in your trading strategy.

However, many traders fail to put all of these principles into practice. This is exactly where you find the difference between winning traders and losing traders.

By conducting surveys of traders, we can easily see the difference between winning traders and losing traders, beginners who have difficulties, and pros who excel: it is simply the rigor.

For example, you can write a number of money management rules on a post-it:

  • I know why I open this trading position (technical and/or fundamental factors).
  • I plan to place a stop loss.
  • The maximum loss on this position does not exceed 1 % to 3% of my trading capital.
  • The risk/reward ratio is equal to or greater than 1: 2 (or 1: 1, 1: 3, 1: 4 depending on your trading style).
  • My accumulated losses on the day (or week) does not exceed 20% of my capital. Otherwise, I stop trading for today.

This money management techniques in forex trading can thus prevent you from trading too much, and limit your exposure to risks.

12. Calculate Maximum Loss

How much to risk in trading by position. How to calculate the maximum loss of a trade.

Calculate the risk involved in each trading position. If the chances of profit are lower compared to potential earnings, look for another trading opportunity.

To trade with gains, you must know in advance how much you can lose and win on your position.

Use a trading calculator to calculate the position size, the lot, the spread, the swap and all the other parameters of your position.

13. Money Management Forex Excel

No need to look for expensive money management software or money management in forex excel files already done. Check your market exposure in real-time.

Although you want to make gains as quickly as possible, the first and most important thing you can do is stay in trading without losing money.

If you’re broke, obviously you can not make winning orders. It is natural to lose some trades from time to time, but the goal is not to spend all your trading capital.

A Forex trader must make the habit of analyzing the risks before placing money on a trade.

We must trade only when we have real trading opportunities.

Money Management

If you want to earn money by trading binary options or Forex, you must first take care of your money. You can’t control financial markets, however you can control your reactions to them.

Money management is a very useful tool. If you understand how to correctly and sensibly manage your capital, you will take a leap to become a successful trader.

No matter how experienced you are or how much money you have in your account, you can never avoid loss-making trades. Loss is not an obstacle as long as it’s expected. It is not an obstacle unless it drives you mad and plays with your emotions.

However, if you put most of your money at stake or start panicking after a failure keep opening new trades trying to make up for the past losses, you will go astray.

Money management rules for binary options and CDF trading differ. No matter what type of trading you like, I advise you to read all the articles in this category.

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