If there is one aspect of forex that is treated to b every important and yet being overlooked, it will be money management. We know for fact that when it comes to forex, we are dealing with money. With this, we should know that money management is important in attaining success with this particular business.
Forex training is the key for you to learn the fundamentals of money management. Sound forex training should teach you to:
1. Know the potential profit of every trade and how much you will risk in order to try to make that profit.
2. Know what percentage of your capital you will risk on each trade.
Many technical analysts use trend lines to indicate support and resistance along with Fibonacci projections. This combination can give you the information you need to make sound money management decisions.
How to Determine Support and Resistance
As far as risk is concerned, most seasoned traders look at both short term and long term support and resistance levels. If your trade breaks through a support level and you are looking for it to go up then your trade is in trouble.
The converse is true as far as resistance levels are concerned. If you are selling a currency pair and it goes up beyond the supply level then that trade is in jeopardy.
On a basic level, you can construct support and resistance levels by drawing trend lines that connect the lowest lows (for support) and highest highs (for resistance) over a specific time frame.
How to Determine Profit Targets
Nobody knows in advance how a trade will turn out. However there are methodologies that can give you a pretty good idea. For example, if you are not familiar with Fibonacci projections, you may want to take the time to learn about them. Most professional traders use them to help to determine their profit targets.
What Should Your Risk / Reward Ratio Be?
Most sound money management strategies employ a risk/reward ratio that is at least three or four to one. What that means is that you should want to earn at least three to four times what you are prepared to lose in your trade.
Thus, if you only have to win one trade out of four or five trades in order to break even, you only have to be correct twenty to twenty-five percent of the time. Sound trading strategies often do considerably better than that.
How Much Should You Risk?
Many beginning traders decide on how many lots to purchase based on how they feel about the trade. This is a sure recipe for disaster because no one knows how any particular trade will unfold. Most novice Forex traders, if they have a money management plan at all, also risk much too much of their capital on their trades.
Some money management systems are dynamic. With these, successful traders may risk a larger percentage of their capital when they are winning, for example three to four percent, and a smaller percentage of their capital when they are losing – perhaps one to one and a half percent.
Other professional traders risk a fixed percentage on every trade. If you choose to use a fixed percentage, most astute investors advise that you risk two percent or less of your account on any given trade.
Always remember that combining sound money management and with a great trading strategy will give you profit you never imagined you would gain. That is a fact you should know with money management.