Forex traders tend to focus on the strategic aspects of their trading and most Forex education organizations are geared to satisfying this specific need. Have a conversation with a currency trader. Over 90% will speak about indicators, candlestick patterns or the latest combination of technical studies that can get you into trade 2-3 candlesticks before anyone else.
Look for the 10% who speak about not being sure where the market is going and how they manage their stops. I got news for you; these are the successful Forex traders!
Yes, Strategy is important, very important; however, it is only one of the three pillars of successful Forex trading. To achieve success all three pillars must be in place and strong. Knowing yourself is the path to ultimate success, but until one conquers self-mastery, profit can truly be found in money management.
Here are 3 simple, but powerful money management tips that will keep your account size growing while your personal and strategic skills develop:
1. Adhere To Your Reward to Risk Ratio
Maintain at a minimum a 2 to 1 reward to risk ratio. That means that the currency pair’s price target should be twice the amount in pips of the stop-loss. If you have a price target that is 60 pips away from your entry and your stop should be 20 pips away from your entry, this means you have a 3 to 1 reward to risk ratio.
Congratulations, you cleared the first hurdle, but this still does not represent a good trade for money management.
2. Use Stops
Always use a stop-loss! Write this one in stone. I see novice currency traders make 2 huge money management errors with stop-losses;
a.. They simple do not use one.
b. The use a set amount of pips for a stop loss.
Set your stop loss based off of your chart technicals. You must give your trade room to work or it is doomed to stop you out. Establishing your price target and chart stops will allow you to evaluate the reward to risk ratio. Do not use a set 20 or 30 pips stop loss. Let the chart tell you where the stop should be and let step 3 be the final judge!
3. Manage Your Overall Account Risk
Most every expert recommends establishing a 1-5% risk profile. So at any given time you will never risk more than 1-5% of your account that is not already in a trade. That’s right. Not your total account, the portion that is not already leveraged in a trade.
The goal here is to continue to play the Forex game. In order to do this the currency trader must understand the amount of maximum loss prior to ever getting into a trade.
Now a determination can be made on whether a trade is affordable. The trade could have all the technical stars aligned, exceptional reward to risk ratio, but if the risk profile is violated it is ultimately a bad trade. Losing trades are part of doing business in the Forex market; however, bad trades are the quickest way to back to that 9 to 5!
Strong money management techniques are one of the 3 pillars of successful Forex trading (strategy and self-mastery are the others). It is money management that allows the Forex trader to manage their trading business like a casino and give power to their trading edge.
It is better to have a poor trading strategy with solid money management than vice versa. Mastering your money will allow you to stay in the game and compound your account into profit. Again, don’t get caught up in all the hype. Common sense rules the roost! Use these tips and you too will find success in the Forex market.
ABOUT THE AUTHOR: Todd Judkins specializes in teaching real people how to trade the Forex market for long term success by focusing on strategic, mind and money skills. He is a currency trader, educator and success coach to traders. Are you now ready to take action? To begin training with Todd immediately, online Forex trading visit: http://www.forexjourney.com and sign up for his FREE Video Newsletter.
Friday 4 May 2007
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