Money Management is one of the most important aspects of forex trading. However, many traders often ignore and misunderstand Money Management rules. Acording to Finance Magnates, having a proper money management technique is to ensure that you can remain in the markets long enough to become profitable, because when the money is gone the game is over. The scapegoat when trading failures are usually strategy. Additionally, the traders are generally more diligent in looking for a holy grail trading system than powerful Money Management. However, this can be understood because indeed the rules of Money Management can be very complicated.
Check out 5 the most simple and popular Money Management among traders:
The Money Management rule with 1% Rule states that you should not risk more than 1% equity in trading position. For example, if you trade with a capital of $ 1000, then based on 1% Rule. Do not allocate more than $ 10 per trade. It sounds simple, but its application can be quite confusing.
For example, if with this capital you trade with a mini lot size of 0.1, it means that the stop loss must be placed around 10 pips from the entry position. It’s really narrow, right? And this narrow stop loss can be considered the same as inviting loss. However, if you use a 0.01 micro lot, a stop loss can be placed around 100 pips from the entry position. From this example it can be understood that Money Management rules are not only related to how much capital will be used, but also how many lots and where stop loss will be placed every time you open a position.
Actually, there are several variations of the 1% rule. Larger capital traders can apply the 1% rule on total capital. That is, no matter how many trading positions open, the total funds at stake do not exceed 1% of the capital. There are also those who change the percentage of this rule to 2%, 5%, etc. It depends on the strength of the funds owned and how much risk they are willing to bear.
Risk / Reward Ratio
The concept of Money Management which is generally considered the most ideal to use a risk/reward ratio, specifically 1: 2. This Money Management rule means that if you dare to bear the risk of $ 10, then ideally you can make $ 20 if you profit. With a risk/reward ratio of 1: 2, every time profit can cover one previous loss while earning a profit. With this, you can reduce losses little by little and get profits. As long as the Win Rate of the trading system that has been made is at least 60%.
Use Large Leverage
This Money Management rule is profitable for traders with coins, but it is actually quite controversial. In general, large-capitalized traders tend to use low leverage in the dozens. However, small traders with capital under $ 10,000 usually use leverage of 1: 100 or more in order to get a profit.
To meet this need, many brokers have offered leverage options even up to 1: 1000. The advantage for traders who use this leverage is clear. The greater the leverage, the greater the strength of the margin / equity in the account to hold the floating position, so it is not easy to get Margin Calls too.
On the other hand, too much leverage obscures the trader from real market risk. Profits that appear to be large turn out to be smaller, while small losses gradually become large without realizing it.
Trade Pairs with Low Spreads
Many traders choose the pair currency to trade at random, without realizing that such a decision can have a big impact on the money management that is carried out. For example, trading on exotic pairs can cost spreads of 50 pips or more. Imagine how difficult it is to reach profit targets with such wide spreads.
The solution chosen by many traders is to choose to trade on the most liquid pairs, such as major pairs, where the spread is only a matter of one digit or even below 1 pip.
Setting Realistic Targets
This may be the simplest Money Management rule, but many traders ignore this rule. This is because many traders dream of sudden riches, the trader is targeting a 100% return in a month.
Indeed there are certain traders who reportedly can make such crazy profits, but they may be more experienced and trading with greater capital. Greed is often the culprit of traders’ losses, so be careful not to be swayed by the devil’s temptations on this one. Set realistic targets, whether in daily, weekly or monthly trading.