Money Management - Crucial Factors to Making Money Through Forex
In this article you will learn the most recent and crucial aspect to succeed in trading, which is to keep your losses at a minimum to be safe from trading account losses.
They key to success when trading in Forex, or any other market, is to have very small losses but big wins. Making money does not require an 80-100% winning rate although keeping focused on keeping big losses at bay and maximizing your earnings in trading. How do you protect yourself from a big Forex loss?Well, it's simple. You will first need to figure out what turn the market has to take to PROVE your trade a good one. Most times using the previous swing low for buys and the swing high's for sales with addition to a few pip padding so you don't get knocked out by the noise and end up missing out on a profitable move works out quite well. Utilizing the TopGun Software which was developed by my partner and I, we've created a system with a 60-80% chance of winning, however like I mentioned earlier, a high win rate isn't required. Although having a high win rate system will enable you to utilize smaller stops (most USD pairs have a maximum of 10-2 pip stops). The following pip stock will determine the percentage that you're willing to risk on every trade. A good base line would be 2% per trade.This way you will be able to have 5 consecutive losses, although it's rare but does happen occasionally on Forex. NOTE TO ADVANCED TRADERS If you are an experienced and successful trader then most likely you will have various Forex systems, methods, as well as strategies. Some can work for 50% of the time, although others don't occur very often but when they do they have a 80-100% winning rate when they do work. For advanced traders, I only recommend that you risk more on super high winning % trades due to the fact that they have a much higher number of pip gains than most systems. For example, normal systems have a 40-60% winning rate although they only find a low number of trades weekly which are at around 80% winning rates and they have big wins, so I recommend around 30-50+ pips to increase your trading size. I will augment my trades by 30-100% This can effect your AVG WIN size greatly, although that I'll cover later as well as how this has an effect on your NET PROFITABILITY! Once you make up your mind on the 2 decisions above, then you will be able to figure out how much you want to trade on Forex. Mini lots are at $10k while full lots are at $100k or currency and mini lots have a value of $1 for every pip while full lots have a value of $10 for every pip of price movement. Number of lots to trade = ( Account Size X Risk % per trade ) / ( Stop in pips * Value per pip ) So for example, lets say that you have a $5,000 account and you're risking 2% on a trade in which you're you have a 10 pip stop and you're trading on mini lots ($1 for every pip). $5,000 x .02 = 100. That means that the most you can loose is $100 on that trade which is only accountable for 2% of your account. Then you just take the 100 and then divide it by the 10 pip stops you have * $1 per pip=10 which then results in 10. You are able to trade 10 mini slots in this trade which is the same as 1 full lot. If you happen to be a full lot trader then you can take ($5,000 x .02) / (10 * 10) and you would end up with 1 lot! Easy as that! But that's only the beginning. In order to profit, you need to have 50% more of average wins than you do losses! Meaning, that if you loose $100 on average when you're wrong, then you should be able to score $150 on an average winning trade. In both my experiences as well as the accounts of almost 2,000 traders which I've been watching, I've determined that big wins (30-50+ pips) on average occur at a rate of 10-20% for most of us. Meaning that often we win 5, 10, 15, or 20 pips. When we win big 30-50+ pip wins then our average win just increases even more. The formula for profitability is Number of trades X winning % X average win amount in dollars minus Number of trades X losing % X average loss amount in dollars.So there are a couple of things that you can do to AUGMENT your earnings on Forex. For one, increase your percentage of wins while doing whatever you can to minimize your losses. Our traders are taught to move their stops to BREAK EVEN when the market begins to move 10-12 pips their way. This however does lower the winning % by a slight amount, although it DRAMATICALLY minimizes your average loss in dollars! It is one of the few secrets in trading which you will rarely find in a book and I've got various winning traders which make a good amount of money trading Forex due to their low losses, just break evens on the majority of the trades which don't work! You should also AVOID trades which don't benefit you 50% more than what you're risking. For example, when you see 2 or 3 resistance points above 5 pips than the current price while using a 10 pip stop, DON'T TAKE THE TRADE! If you have a "possibility" to gain 5 pips while you risk 10, you will surely not have success when trading currencies. AVOID IT, AT ALL COSTS! Although, on the other hand if the next following resistance area is 30 pips further and you've got a 10 pip stop while the trade is at 50-60%+ likely to work, then TAKE the trade since the 20-30 pip wins will augment your average winning trade. That is yet another reason why you should increase your trade size on the trades that you think have a chance of 80-100% of working or have a high possibility of giving you huge gains.
They key to success when trading in Forex, or any other market, is to have very small losses but big wins. Making money does not require an 80-100% winning rate although keeping focused on keeping big losses at bay and maximizing your earnings in trading. How do you protect yourself from a big Forex loss?Well, it's simple. You will first need to figure out what turn the market has to take to PROVE your trade a good one. Most times using the previous swing low for buys and the swing high's for sales with addition to a few pip padding so you don't get knocked out by the noise and end up missing out on a profitable move works out quite well. Utilizing the TopGun Software which was developed by my partner and I, we've created a system with a 60-80% chance of winning, however like I mentioned earlier, a high win rate isn't required. Although having a high win rate system will enable you to utilize smaller stops (most USD pairs have a maximum of 10-2 pip stops). The following pip stock will determine the percentage that you're willing to risk on every trade. A good base line would be 2% per trade.This way you will be able to have 5 consecutive losses, although it's rare but does happen occasionally on Forex. NOTE TO ADVANCED TRADERS If you are an experienced and successful trader then most likely you will have various Forex systems, methods, as well as strategies. Some can work for 50% of the time, although others don't occur very often but when they do they have a 80-100% winning rate when they do work. For advanced traders, I only recommend that you risk more on super high winning % trades due to the fact that they have a much higher number of pip gains than most systems. For example, normal systems have a 40-60% winning rate although they only find a low number of trades weekly which are at around 80% winning rates and they have big wins, so I recommend around 30-50+ pips to increase your trading size. I will augment my trades by 30-100% This can effect your AVG WIN size greatly, although that I'll cover later as well as how this has an effect on your NET PROFITABILITY! Once you make up your mind on the 2 decisions above, then you will be able to figure out how much you want to trade on Forex. Mini lots are at $10k while full lots are at $100k or currency and mini lots have a value of $1 for every pip while full lots have a value of $10 for every pip of price movement. Number of lots to trade = ( Account Size X Risk % per trade ) / ( Stop in pips * Value per pip ) So for example, lets say that you have a $5,000 account and you're risking 2% on a trade in which you're you have a 10 pip stop and you're trading on mini lots ($1 for every pip). $5,000 x .02 = 100. That means that the most you can loose is $100 on that trade which is only accountable for 2% of your account. Then you just take the 100 and then divide it by the 10 pip stops you have * $1 per pip=10 which then results in 10. You are able to trade 10 mini slots in this trade which is the same as 1 full lot. If you happen to be a full lot trader then you can take ($5,000 x .02) / (10 * 10) and you would end up with 1 lot! Easy as that! But that's only the beginning. In order to profit, you need to have 50% more of average wins than you do losses! Meaning, that if you loose $100 on average when you're wrong, then you should be able to score $150 on an average winning trade. In both my experiences as well as the accounts of almost 2,000 traders which I've been watching, I've determined that big wins (30-50+ pips) on average occur at a rate of 10-20% for most of us. Meaning that often we win 5, 10, 15, or 20 pips. When we win big 30-50+ pip wins then our average win just increases even more. The formula for profitability is Number of trades X winning % X average win amount in dollars minus Number of trades X losing % X average loss amount in dollars.So there are a couple of things that you can do to AUGMENT your earnings on Forex. For one, increase your percentage of wins while doing whatever you can to minimize your losses. Our traders are taught to move their stops to BREAK EVEN when the market begins to move 10-12 pips their way. This however does lower the winning % by a slight amount, although it DRAMATICALLY minimizes your average loss in dollars! It is one of the few secrets in trading which you will rarely find in a book and I've got various winning traders which make a good amount of money trading Forex due to their low losses, just break evens on the majority of the trades which don't work! You should also AVOID trades which don't benefit you 50% more than what you're risking. For example, when you see 2 or 3 resistance points above 5 pips than the current price while using a 10 pip stop, DON'T TAKE THE TRADE! If you have a "possibility" to gain 5 pips while you risk 10, you will surely not have success when trading currencies. AVOID IT, AT ALL COSTS! Although, on the other hand if the next following resistance area is 30 pips further and you've got a 10 pip stop while the trade is at 50-60%+ likely to work, then TAKE the trade since the 20-30 pip wins will augment your average winning trade. That is yet another reason why you should increase your trade size on the trades that you think have a chance of 80-100% of working or have a high possibility of giving you huge gains.
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