Fundamentals of Forex Money Management. Setting forex money management cannot be done haphazardly. Here are 5 things you need to know to get a safe way to invest in forex.
On the way to achieving forex trading success that is realized from consistent profits, having forex money management is a mandatory measure to ensure account continuity.
The importance of forex money management itself has been explained in this article. However, there are 5 basic forex money management applications that have not been explained in this discourse.
5 Fundamentals of Forex Money Management
The principles of using forex money management can be a very useful foundation for the development of your forex trading. At least, that has been confirmed by Nial Fuller. He is a master price action and professional trader who personally sorts out the 5 basic forex money management below, as a way of investing in forex that can help your success.
1. Accept the Risk of Loss
The first and perhaps the most important step in forex money management is accepting the potential for defeat. In almost every open position, many traders feel confident that their trade will be successful just because they see the setup. In fact, in forex trading anything can happen, including price movements beyond expectations that make traders lose positions.
Understanding and anticipation will prepare traders mentally to be aware of potential losses. Thus, from the start he will prepare proportional forex money management for loss conditions. In addition, this understanding is very effective in preventing random traders from opening large positions, so that the method of investing in forex will always be carried out by minimizing risk according to tolerance limits.
2. Prioritize Risks
Believe it or not, professional traders manage accounts with the goal of managing risk. How many times their position will win, or how much profit can be made is not their top priority.
They believe that once they have successfully mastered forex money management techniques and driven away big losses consistently, the profits will follow by themselves. In how to invest in forex in the style of a successful trader, the logic is to protect trading capital first, because it will later be used as ammunition to make a profit.
Prioritizing risk can be the basis for good forex money management, because it can mature traders’ perceptions to think far ahead. After all, the various ways of investing in forex that traders try to achieve are sustainable profits, not one-time profit and then leave the next result to fate.
3. Avoid Overtrading
Overtrading is usually done by those who do not have a forex trading plan. However, even traders who are equipped with a plan can do it, especially if they don’t have a solid forex trading plan or are still often affected by trading emotions. This is certainly contrary to the main function of forex money management which is related to the protection of capital in trading accounts.
Why is that? Under the influence of overtrading, a trader will not consider any forex money management except for continuing to open positions in pursuit of profits. He did not carefully calculate the opportunity, as well as the risks. If that’s the case, then he won’t realize that his capital is in danger of big losses.
To revive this awareness, steps to avoid overtrading really need to be done. If a trader already understands the dangers of overtrading and implements efforts to avoid it, then this will further guarantee the implementation of forex money management with good consistency.
4. Time Frame Does Not Determine Trade Size
How to invest in forex on a large time frame is not the same as the freedom to take more risks. Just because it can accommodate more stop loss sizes, trading on large time frames doesn’t mean it’s riskier than how to invest in forex on small time frames.
The key to forex money management here is determining the size of the trade. Let’s say you are trading forex with a size of 0.01 lots on a large time frame, so the risk will not be more than trading 1 lot on a small time frame. And even that hasn’t taken into account the price noise factor and a series of other short-term trading drawbacks.
So if you feel comfortable using a medium-long term trading strategy on a large time frame, you don’t need to be discouraged if the capital you have prepared is small. You can use this basic forex money management to reduce trade size and reduce risk.
5. Don’t be Greedy
This basic forex money management can apply to many aspects of trading. But in this discussion, the rules apply to determining profit targets.
It is legal for a trader to set a profit target that is twice as big as the risk, as in calculating the risk/reward ratio of 1:2. However, what became a further problem was the impatience of traders to widen their profit targets after experiencing a few wins.
One of the main motivations for committing the above ‘forbidden acts’ is greed. The desire to get big profits in a short time is very effective in motivating traders to loosen take profits even though it’s not yet time. If you are still at the beginner level, you should be consistent with your risk/reward ratio over a certain period of time. Pay attention to whether you have experienced skill development and managed to maintain consistent overall trading gains.
Adding profit targets without careful consideration will only lead to more losses. An easy example, you change the risk/reward ratio from 1:2 to 1:3, without really measuring its potential. Say at that time the price tends to move sideways, so it is very likely that the price will touch the stop loss faster than the take profit.
Therefore, avoid being greedy if you want to apply ideal and realistic forex money management. Enlarging profit targets does not need to be done in a hurry. If you prioritize protecting your account from the risk of loss, then you will know when is the right time to safely increase your profit target. Fundamentals of Forex Money Management