Behind the competent strategies and techniques that you have in Forex trading is the tested and right way of managing your funds. Once you have crafted and tried this money management method, you will be able to determine which entry has the highest probability of success. Then after you reach the optimal position size combined with properly backed-up money management plans, you will now feel safe as your funds are properly safeguarded against unforeseen incidents that could negatively affect your trading account.
However, if you want to avoid experiencing the drawbacks of the Forex market, you may try this approach that will help you with your money management strategy.
Trade With A Fixed Position Size
Being simple and yet reliable, this approach is the casual means of entering a trade. No matter the market conditions out there, it will have little to no consideration applied to your capital or the capital’s percentage.
If you choose to follow this method, it is important to take into consideration the entry and exit points of the market and always calculate the risk/reward ratio. But be wary of this method because if you won’t be cautious enough, you will encounter serious troubles. The main downside of this method is when the trader refuses to consider the account size. This way, the trader will not be able to predict the amount of money that will be put to risk once you enter a trade.
Trade with Fixed Risk Size
This method is all about calculating the risks. When you enter a trade, you need to know the risks involved. The first thing you can do to determine the fixed risk size is by pinpointing what you are willing to lose in the trade. For instance, you have decided to take $20 as your risk for every trade you make. After that, you have to determine the risk points involved, 150 pips for instance. The final step is to determine the rate value, for instance, $1.0000. Use this formula;
S(position size) = R(desired risk) / S(stop-loss size in pips) x P(pip value for a contract)
For the example mentioned above, the position size must be 0.13 contracts.
Trade with Fixed Risk Considering the Percentage of Capital
When using this method, the first question that you should ask yourself is the amount of capital that you are willing to lose in this trade. This means that the amount that you are willing to lose is the fixed percentage of capital in your trading account.
Money Management as your best trading strategy
With proper money management, you are sparing yourself from all sorts of hardships in trading. There are a huge number of traders who quit the market after experiencing some failures and drawbacks. But remember that when you quit, you have nowhere to go. You will get stuck in despair because you are not emotionally strong in accepting that failure is part of Forex trading. It’s okay to experience small losses as long as you learn from it and find ways to counter possible failures in the future.