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Forex Money Management:
Forex Money Management:The fact is that most traders, regardless of how intelligent and knowledgeable they may be about the markets, lose money. What could be the cause of this? Are the markets really so enigmatic that few can profit, or are there a series of common mistakes that befall many traders? The answer is the latter, and the good news is that the problem, while it can be emotionally and psychologically challenging, can be solved by using solid money management techniques. Most traders lose money simply because they do not understand or adhere to good money management practices.. Part of money management is essentially determining your risk before placing a trade. Without a sense of money management, many traders hold on to losing positions far too long, but take profits on winning positions prematurely. The result is a seemingly paradoxical scenario that in reality is all too common: the trader ends up having more winning trades than losing trades, but still loses money. So, what can traders do to ensure they have solid money management habits? There are a few key guidelines that every trader, regardless of their strategy or what instrument they are trading, should keep in mind: Risk-Reward Ratio. Traders should establish a risk-reward ratio for every trade they place. In other words, they should know much they are willing to lose, and how much they are seeking to gain. Generally, the risk-reward ratio should be 1:2, if not more. This means risk should equal no more than one- half of the potential reward. Having a solid risk-reward ratio can prevent traders from entering positions that ultimately are not worth the risk. Stop Loss Orders. Traders should also employ stop-loss orders as a way of specifying the maximum loss they are willing to accept. By using stop-loss orders, traders can avoid the common scenario where they have many winning trades but a single loss large enough to eliminate any trace of profitability in the account. Due the importance of money management to long-term successful trading, the use of a stop-loss order is imperative for any trader who wishes to succeed in the currency market. The stop-loss order allows traders to specify the maximum loss they are willing to accept on any given trade. If the market reaches the rate the trader specifies in his/her stop-loss order, then the trade will be closed immediately. As a result, the use of stop-loss orders allows you to quantify your risk every time you enter a trade. There are two parts to successfully using a stop-loss order: (1) initially placing the stop at a reasonable level and (2) trailing the stop — meaning moving it forward towards profitability — as the trade progresses in your favor. Placing the Stop-Loss: Here are two recommended ways of placing and trailing a stop-loss order: Two-Day Low. This technique involves placing your stop-loss order approximately 10 pips below the 2 day low of the pair. The idea behind this technique is that if the price breaks to new lows, the trader does not want to hold the position. For example, if the low on the EUR/USD’s most recent candle was 1.2900, and the previous candle’s low was 1.2800, then the stop should be placed around 1.2790 — 10 pips below the 2 day low — if a trader wishes to enter. As another day passes, the trader can raise the stop to 10 pips below the new two-day low. Parabolic SAR. One type of volatility-based stop is the Parabolic SAR, an indicator /‘that is found on many currency trading charting applications. Parabolic SAR is a volatility-based indicator that graphically displays a small dot at the point on the chart where the stop should be placed. Below is an example of a chart using Parabolic SAR.
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