Money Management is a part of trading with a vital importance because with the same trading strategy we can get completely different results depending on how we manage the money.
Most beginner traders overlook money management and go straight into the action and this will inevitably lead to the loss of their account. To try to understand how important Money Management is, we will set an example. Imagine that we have tried a trading strategy that hits 70% of the chances and the volume of loss and profit per transaction is identical to see it more clearly. A priori this system seems to give us an assured benefit but unfortunately things are not so simple. If it turns out that we risk 15% of our account for each operation and it happens that we have 5 consecutive loss operations (something that is very likely to happen in a very short time) we will have lost almost the entire account making it practically impossible to recover the Money (not to say profit).
We have compiled a series of basic rules of Money Management to avoid that you fall into fatal errors and the probability of obtaining benefits is much greater.
1. Operate only with an amount you are willing to lose.
We must operate with a real account only with a balance that we can assume the total loss. If not, we would have a very high trading stress and we would skip the rules of our trading system. Experience has shown that traders who have an imperative need to win end up losing because they operate under pressure and make fatal decisions.
This is something that we must take very seriously and perform trading with a balance that in case of losing it completely will not leave us in a desperate situation.
2. Do not overeverage.
It is important not to carry out operations with a very high pressure. Professional forex traders seldom use leverage greater than 1:20. As we have commented on other times many brokers pray in their advertising succulent leverage of up to 1: 1000 or greater to attract inexperienced traders who want to make money fast and see leverage as a definitive weapon. Many beginner traders think of a "pelotazo", that is, perform few transactions with a very large amount thanks to the leverage and if they are good run out with the money. This is probably the main reason why there is the famous statistic that 95% of traders lose money.
As you have already realized in forex can only survive in the market if we are prudent, we have patience, a good trading system and we have in our mind basic rules of Money Management. Excessive leverage will sometimes lead to the broker closing a position because we do not have sufficient collateral to keep it in case the market moves against us (Maintenance margin).
3. Do not risk more than 2% of your account per operation.
In this way we guarantee that if we accumulate several consecutive loss operations the damage that will be done in our account is small and we will recover it quickly. If we risk 2% of our balance per transaction, in the event that we have 10 consecutive transactions in losses (it is more probable than you think) we would lose 10% of our account that is acceptable and we can recover it with some ease. This limits the DrawDown which is the maximum decrease we can have in a bad run of operations.
4. Manage the Ratio Risk / Benefit correctly
This is to properly manage the relationship between average loss per operation and average profit per operation. We recommend a ratio of at least 1: 2, that is, we should earn on average twice the amount we lose when an operation goes wrong.
This is what will allow us to obtain benefits without having a very high success rate. If we deal with a ratio of 1: 2 we can make profits by only 50% of the chances. This is very important to take into account in our trading system.
When we have defined a strategy of trading we recommend to only operate when apart from be the conditions of the strategy (e.g. a crossing of EMAS) a very good opportunity in the sense in that there is very likely to get a great benefit in case of success. If the movement of the pair in our favor will be very small in the long run it is likely to lose money.
5. Whenever we open an operation we must take into account the Stop-Loss
A very common mistake is to confuse this with the first rule of 2% per operation risk. Stop-Loss should be fixed by looking at the graph and observing the support and resistance zones. We can use a moving average a parabolic SAR to see it more clearly. If we open a long position we must fix the Stop-Loss in the Support area or slightly below.
Most beginner traders overlook money management and go straight into the action and this will inevitably lead to the loss of their account. To try to understand how important Money Management is, we will set an example. Imagine that we have tried a trading strategy that hits 70% of the chances and the volume of loss and profit per transaction is identical to see it more clearly. A priori this system seems to give us an assured benefit but unfortunately things are not so simple. If it turns out that we risk 15% of our account for each operation and it happens that we have 5 consecutive loss operations (something that is very likely to happen in a very short time) we will have lost almost the entire account making it practically impossible to recover the Money (not to say profit).
We have compiled a series of basic rules of Money Management to avoid that you fall into fatal errors and the probability of obtaining benefits is much greater.
1. Operate only with an amount you are willing to lose.
We must operate with a real account only with a balance that we can assume the total loss. If not, we would have a very high trading stress and we would skip the rules of our trading system. Experience has shown that traders who have an imperative need to win end up losing because they operate under pressure and make fatal decisions.
This is something that we must take very seriously and perform trading with a balance that in case of losing it completely will not leave us in a desperate situation.
2. Do not overeverage.
It is important not to carry out operations with a very high pressure. Professional forex traders seldom use leverage greater than 1:20. As we have commented on other times many brokers pray in their advertising succulent leverage of up to 1: 1000 or greater to attract inexperienced traders who want to make money fast and see leverage as a definitive weapon. Many beginner traders think of a "pelotazo", that is, perform few transactions with a very large amount thanks to the leverage and if they are good run out with the money. This is probably the main reason why there is the famous statistic that 95% of traders lose money.
As you have already realized in forex can only survive in the market if we are prudent, we have patience, a good trading system and we have in our mind basic rules of Money Management. Excessive leverage will sometimes lead to the broker closing a position because we do not have sufficient collateral to keep it in case the market moves against us (Maintenance margin).
3. Do not risk more than 2% of your account per operation.
In this way we guarantee that if we accumulate several consecutive loss operations the damage that will be done in our account is small and we will recover it quickly. If we risk 2% of our balance per transaction, in the event that we have 10 consecutive transactions in losses (it is more probable than you think) we would lose 10% of our account that is acceptable and we can recover it with some ease. This limits the DrawDown which is the maximum decrease we can have in a bad run of operations.
4. Manage the Ratio Risk / Benefit correctly
This is to properly manage the relationship between average loss per operation and average profit per operation. We recommend a ratio of at least 1: 2, that is, we should earn on average twice the amount we lose when an operation goes wrong.
This is what will allow us to obtain benefits without having a very high success rate. If we deal with a ratio of 1: 2 we can make profits by only 50% of the chances. This is very important to take into account in our trading system.
When we have defined a strategy of trading we recommend to only operate when apart from be the conditions of the strategy (e.g. a crossing of EMAS) a very good opportunity in the sense in that there is very likely to get a great benefit in case of success. If the movement of the pair in our favor will be very small in the long run it is likely to lose money.
5. Whenever we open an operation we must take into account the Stop-Loss
A very common mistake is to confuse this with the first rule of 2% per operation risk. Stop-Loss should be fixed by looking at the graph and observing the support and resistance zones. We can use a moving average a parabolic SAR to see it more clearly. If we open a long position we must fix the Stop-Loss in the Support area or slightly below.
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