If you want to be a successful trader you need to know 2 things. The first one is money management. You probably have heard this dozens of times, some of you may even have implemented some kind of Lot management in their EA or trading strategies and believe that it will do, alone as it is.
In order to perform a correct Money Management one MUST understand what the concept behind the two words is. Eventually you'll figure out yourself that the number of Lots you are going to trade in your next trade should not be chosen by a function, the only variable of which is how much money you currently have on your account. This can be achieved only by using a certain kind of strategies that we need to identify and describe first.
The meaning of Money Management.
A concept is only 2 words: Money and Management.
To manage, means to handle. When we talk about Money Management we are talking about money. What we want is to have a direct control (handling) over the way we invest our capital.
Now, when we place an order we have control on its volume (Lots), no figure in "money" terms is directly involved. If we want to handle our money with knowledge, we must be able to translate that volume to our deposit currency in order to estimate the potential loss associated with the order.
Successful Traders
We had heard many times that if we want to win in Forex we need to never risk more than 2%. Well lets keep that in mind and we will see that it works.
What you have to do is just to quantify how much is 2% of your capital and avoid to risk more than that sum next time you open a position… sounds stupidly easy… so why didn’t you do it so far?
If you want to win you must be willing to lose
At first glance one can say: winning=good, loosing=bad.
Following this reasoning one is driven to think that avoiding losses is a good starting point on the long way to become a Successful Trader.
Those strategies make no use of StopLoss and let the loss grow until the Market comes eventually back in their favour and the position becomes profitable.EAs developed on those strategies usually show very good profits and no losses at all (win ratio is usually more than 95%). This behaviour is anyway stable for a relative short period and when the loss comes it comes unexpected and huge… sometimes one single series of losses is enough to drain the account empty. It's the typical mistake of the newbie that attempts to code his first Grail. Been there.Systems like this work fine until the Market has a strong trend in one direction but becomes absolutely dangerous when the trend disappears or changes direction.
Ignoring losses is definitely not the way to go if we want to see our Capital grow on long/medium term period.
We want our strategies to be able to survive the toughest conditions we can find out there so we do want to avoid using a system that works only for short periods introducing the risk to lose most of our capital when things go bad.
There Is No Safe Trading without StopLoss
Before we come to describe how to implement Money Management in a practical way, it is worth to mention something that kills a large number of Traders.Many beginners and experienced Traders trade without using any hard SL. Who codes an EA tends to think that it will take care of everything, following the market closely and babysitting open positions ready to close them when things go wrong. Nothing could be more far from the truth.In fact when you don’t place a hard SL you don’t really know when the position will be closed in case the Market turns against you… you actually cannot be sure that it will be closed at all!!!How can you pretend then to handle your money with knowledge?
A strategy which makes no use of hard StopLoss CANNOT implement a sound Money Management!
SL level shall always be chosen looking at the current condition of the Market, so called Price Action. Who uses fixed SL (say very common 20 or 50 pips) has probably a very limited understanding of the Market and trading in general. In fact SL shall be wide enough to avoid being wiped out in case the Market retraces back against you… but not too wide otherwise one would have a very limited return compared to the risk he is taking with the trade.
As a general rule:
you want to have as many support/resistance levels as possible between the current Price and your SL
This will ensure that if the Market turns against you it has a chance to slow down and go back in the right direction before hitting your SL.
I hope we can help achieve your goals and understand a little bit more about Forex and how to trade in it.
