After knowing the two previous key points in learning Money Management that you must understand and apply it correctly in forex trading, let’s continue our discussion about the next three.
5 Key Points in Learning Money Management
The amount of Risk/Reward Ratio
The risk/reward ratio is a comparison between the amount of risk (Stop Loss) and the amount of profit target (Reward) that we set. After determining the risk and lot size, the next step is to determine the size of the profit target we want, compared to the risk we have set before.
As with risk, there is no default requirement for setting profit targets. We have to be objective and realistic based on current market conditions. Experienced traders recommend that the Risk/Reward Ratio should be at least 1:2. It means that if our Stop Loss is 50 pips, then we should target a minimum profit of 100 pips, even if possible 1: 3 or more. The greater the ratio used, the better the effect on the level of profitability of trading.
The important thing to understand in this part of learning about Money Management is determining the amount of risk before calculating the profit we might get.
Money Management must be able to Control Our Emotions
Besides Money Management, another important factor in trading is emotional involvement. These two things affect each other. If you do not understand them correctly, they will bring negative effects in trading. Bad money management can destroy our trading, as well as uncontrolled emotions.
For example, we do not understand Money Management so that there is always a loss in each of our trading positions. Then, it will be difficult for us to not involve emotions when trading. Conversely, the better we can apply Money Management in trading, the more controlled our emotions will be in dealing with trading results. We can say successful learning Money Management if you can manage funds in a trading account effectively and not emotionally.
Money Management will Run Well Only If We Master Trading Strategies
According to Investopedia, trading strategies are employed to avoid behavioral finance biases and ensure consistent results. If we do not fully master the trading strategies used so that we are always doubtful when we want to open a position. Thus, no matter how well we learn Money Management and try to understand it, the results will not be maximal.
Trading strategies and Money Management are the main components in a trading plan that must be carried out simultaneously. Money Management will run well only if we have mastered and are confident in the trading strategies that we use. Thus, we can produce consistent profits in the long run later.
In conclusion, those five key points in learning Money Management will guide you to be a succesful forex traders. If you cannot control your Money Management well, you can even get a great loss. Be careful and good luck, traders.
Read more: 6 Trading Fatal Mistakes that You Should Avoid (1)
