Money Management in Currency Trading (Part III)
Perhaps the best advice that you will receive from someone is live to trade another day. Currency markets are brutal, volatile and ruthless. In minutes you can lose many pips. You should learn to survive in the markets in the long run. Do not lose all your money in a single day.
The single most common factor that causes many traders to blow up their accounts is greed. When you get greedy, you start taking unnecessary risks. You will spend countless hours trying to discover the Holy Grail technical indictor or a forex robot that will make you rich. You believe that by discovering that secret of investing, you will become rich without losing a single trade.
Unfortunately there is no Holy Grail for anyone in trading. You will win and you will lose. So you must learn not to risk more than 2% of your account on one trade. Grow your account incrementally over time. Never ever be tempted to risk big making one single winning trade that can make you rich.
The most important thing that you should know is how much you are willing to risk in a single trade. This is more important than your trading strategy. I said dont risk more than 2% in a single trade. But if you are a risk taker and want to be aggressive, you can go up to 5%. Dont exceed 5%, stay between 1-5%. If you are risk averse and are conservative, on the other hand, you should consider risking between 1-2% only.
Once you have decided on the risk you are willing to take, knowing the rest is simple. Suppose you have a $50,000 account and you decide on a risk of 2%. How much you can risk on a single trade? You can only risk (50,000) (0.02) =$1,000. This is the maximum you should risk on a single trade.
However, if you are trading more than one position at the same time, the amount may become higher. Lets suppose, you are in 3 trades! You risk only $1,000 per trade. So the total money at risk will be (3) (1000) =$3,000. When you have determined your risk, you are can determine the trade size.
Trade size is the number of currency pair contracts you purchase in any one single trade. You need to first determine where you want to put your stop loss in order to determine the trade size. Lets use a simple example to make it clear and suppose you are willing to risk $1000 on trading EUR/USD pair. You decide on a stop loss of 50 pips. Each pip on EUR/USD pair is equal to $10, so the number of contracts that you can trade are 2= (1,000)/ (50) (10).
By calculating your trade size, you have taken the guesswork out of your trading once you have determined your risk level. You can sleep well now. You know how much of your money is at risk. You are going to be able to trade tomorrow. No matter what happens today.
Using these common and simple money management rules will help you avoid the pitfall of losing almost all the money in your account. Never ever take more than 2-5% risk in any single trade. Learning to survive the markets and trading another day is the essence of trading. This can help take your trading to the next level of profitability. - 23229
The single most common factor that causes many traders to blow up their accounts is greed. When you get greedy, you start taking unnecessary risks. You will spend countless hours trying to discover the Holy Grail technical indictor or a forex robot that will make you rich. You believe that by discovering that secret of investing, you will become rich without losing a single trade.
Unfortunately there is no Holy Grail for anyone in trading. You will win and you will lose. So you must learn not to risk more than 2% of your account on one trade. Grow your account incrementally over time. Never ever be tempted to risk big making one single winning trade that can make you rich.
The most important thing that you should know is how much you are willing to risk in a single trade. This is more important than your trading strategy. I said dont risk more than 2% in a single trade. But if you are a risk taker and want to be aggressive, you can go up to 5%. Dont exceed 5%, stay between 1-5%. If you are risk averse and are conservative, on the other hand, you should consider risking between 1-2% only.
Once you have decided on the risk you are willing to take, knowing the rest is simple. Suppose you have a $50,000 account and you decide on a risk of 2%. How much you can risk on a single trade? You can only risk (50,000) (0.02) =$1,000. This is the maximum you should risk on a single trade.
However, if you are trading more than one position at the same time, the amount may become higher. Lets suppose, you are in 3 trades! You risk only $1,000 per trade. So the total money at risk will be (3) (1000) =$3,000. When you have determined your risk, you are can determine the trade size.
Trade size is the number of currency pair contracts you purchase in any one single trade. You need to first determine where you want to put your stop loss in order to determine the trade size. Lets use a simple example to make it clear and suppose you are willing to risk $1000 on trading EUR/USD pair. You decide on a stop loss of 50 pips. Each pip on EUR/USD pair is equal to $10, so the number of contracts that you can trade are 2= (1,000)/ (50) (10).
By calculating your trade size, you have taken the guesswork out of your trading once you have determined your risk level. You can sleep well now. You know how much of your money is at risk. You are going to be able to trade tomorrow. No matter what happens today.
Using these common and simple money management rules will help you avoid the pitfall of losing almost all the money in your account. Never ever take more than 2-5% risk in any single trade. Learning to survive the markets and trading another day is the essence of trading. This can help take your trading to the next level of profitability. - 23229
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading and swing trading stocks and currencies. Trade Dow Futures. Learn Forex Trading.
posted by X - Men @ 9:49 AM
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