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Money management

Forex money management: how to manage your money in Forex?

If I ask you can you say what is the difference between a new trader and a professional trader? Most of the time we get this kind of question.
 
Well, the answer is there are many differences but the main difference is the novice always thinks how much money I can make? On the other hand, a professional trader thinks how much money I could lose in this Forex business.

If you thank upon this for a moment, you will find these two are very opposite to each other. But some of you might ask if, in the beginning, I think about losing money then how can I do well in the business.
 
But those who are professional in Forex trading, they know very well that, the key strategy to win in the Forex business is to manage the laws to survive in the long run.

So the most consistent truth in Forex business, if you continue the business, in the long run, you have to incur some loss at some point regularly.
 
So when we enter a trading business you have to consider loss as a very normal situation. Of course, as an investor or as a trader we don't want to go to loss. But we have to consider loss as a component of reading as the profit does. That is the reason why most of the time we talk about managing the risk factors.

So to be consistent in profitability you need to use protective Stops so that it doesn't expose you to the market risk and when the market moves against you, you can get out of the market very quickly.
 
Emotion in trading cameras much harm especially when you are losing in the trading. Most of the people do not have the plan when to take the exit but the professional traders they plan their exit before they enter into the market.
 
Traders who follow other people, do not have a plan, who cannot identify the risk factors, they lose their money in the three following steps:

Step 1: Hope - It is an obstacle to Money Management

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First is hope, you always hope that the market will go up but ironically it does not.

Step 2:  Wish - It is a perturbation to your Money Management

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When your hope doesn't work you start to wish things. You wish if the market would go up so that you can get back the money you have invested in.

Step 3 : Desperation - Final step to lose your money management control

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The last step is desperation, in front of your eyes, you see that the market is going down and down against you and at some point as margin trader you might lose your money by shut downing your account.
 

So what happened wrong in this trading business? It is very difficult to make a decision when you are already in a tough battlefield. So when you are trading on a demo account it doesn't matter much how you make your decisions. But when you are trading in a real account you put your money online then you Trade either out of fear or out of your emotion.
 
So we should do our business solely based on our sound analyses and thoughtful projection rather than just the need to get out of the trade. How many times you got out of the best trade and then you again saw that the market is moving to the direction your projected. It happens to all the traders. But those who don't want to let this happen to them anymore, take a giant step to be a good brother. For that reason you can follow some strategy:

According to the rule, margins are multiplied by leverage to determine the lot size. Margarita shows the real money from your trading account. Now example you want to trade 1 micro lot which is worth $1000. And if your broker now offers you 1:50 leverage. So now if you want to maintain this $1,000 micro lot then you have to keep $20 of margin in your account. So if we put this in the equation will find:

  • 1st.  First, you have to determine your entry.
  • 2nd. Second, you have to identify your potential risk factors.
  • 3rd. You have to determine your strategy in that particular situation.
  • 4th. Finally, you have to project your potential profit target again and again.

Now the Trading Secret:

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Now think about statistics. The most common, easiest and frequently asked example is a coin toss. It is a 50-50 chance whether there will be ahead or a tail. So when we toss a coin the chance of gaining is 50% and
the chance of losing is also 50%.

So what if we get $1 when we win and lose. $1 when we lose the toss.

When we do this, we are putting ourselves in a position of Break- even. So to be profitable we need to do one of the two things:
 
Whether we need to win a higher percentage in the coin toss or we need to win more when we are right than we lose when we are wrong. So commonly most people prefer to win when they are right.
 
What if, we get $5 when we are right and lose $2 when we are wrong. In this way, we can always be in a profitable position. But I want to do this five days in a week and 24 hours so that I can win in the largest portion of a coin tossed.
 
But we have to remember it is a 50-50 chance in the coin test. So if we separate the winning from the loss that is $5 - $2 Still we have $3 in hand, we can make a profit in this way.
 
The professional trader knows very well that in a single trade he can gain or lose money but he also knows after a series of trades he can come out profitable at the end of the day. If you take 10 trade, out of that, at least in 3 trade you will lose, so if you keep doing this again and again then you can make a profit.

So you have to detach yourself from the outcome of any single particular trade. You have to look at the series of trades, in a month, every 3

months, or yearly. Because the professional traders know after a series
of trade they can make a profit.

They know, they had been profitable in the past, so they know, chances are good, they will make a profit in the future. And this is the key success factor of professional traders, they always try to keep their emotions out of their business.

You have to consider trading as a business rather it is a source of entertainment. So you have to be consistent in your trading approach and how you handle losses. That is one of the best qualities of good traders.

When new traders start their business, in the first trade they make 10 pips, on the second they make 10 pips, again 10 pips but after that in the 4th trade when the market does not move according to their will, they lose 50 pips where they targeted 10 pips. So at the end of the month overall, he lost 20 pips. This is a simple classic winning half of your
trade.

Lot Size = Margin x Leverage

What if the market reverses just before hitting my target:

It is very frustrating that the market just reverses without touching your target profit.

To avoid that move your protective stop to break-even even if at least the market moves halfway to your target.

How many lots should I open?

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For example, if you have $ 4000

If par pip cost: $ 16/pip. So if I have 100 Pips Dollar loss that means: 16*100= 1600 will be your loss, so in this way, you can trade only trice or thrice.
 
So we should risk a very small percentage of our equity. so that we can trade even after 1 loss. So we should rise by 5% or less of our equity. So for example 5% of your 5000 equity.

Conclusion and Recommendations:

So you need to follow few steps in Forex for managing your Fund:

  • Try to Know your Risk per Trade
  • Do not forget to use Stop Loss
  • Always Consider Risk to Reward Ratio of Trades
  • Try to use your Leverage Wisely
  • Don’t let your emotion to trade
  • Try to maintain your Trading Record

Try to read as much information as you can. If you can move in an organized and planned way, you can manage your fund very well.

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