Money Management is one important factor in forex trading related to risk control. Trading is a business that certainly have risks. No matter how large your capital is, you want to limit the amount of risk that might occur. Learning to understand risk control correctly is the key to success in generating consistent profits in the long run.
Many beginner traders have battered accounts because they do not implement Money Management well. Moreover, some don’t even know anything about money management.
The magnitude of risk per trade is measured by the value of money, not by pips. Additionally, it is usually determined as a percentage of capital or balance in your trading account.
Well, why is the risk measured by the value of money, not by pip?
This is related to the large size of the lot or volume per trade that we will use following the calculation of risk, or commonly called position sizing which will be explained in the next point.
The Amount of Lot Size Per Trade (Position Sizing)
The large size of the lot is also called the volume. How to determine trading volume based on risk is commonly called position sizing.
With position sizing, the amount of risk in the value of money will always be the same, no matter how large the Stop Loss (risk in pip) that you specify. You can adjust the trading volume following the most appropriate Stop Loss for you.
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 you set. If in the previous discussion we have determined the risk and lot size, then the next step is to determine the size of the target profit that we want, compared with the risk that we have set before.
As with risk, there is no default requirement for setting profit targets. However, you must be objective and realistic following current market conditions.
Experienced traders recommend that the Risk/Reward Ratio should be at least 1: 2. Thus, if your Stop Loss is 50 pips, then you should target a minimum profit of 100 pips, even if possible 1: 3 or more. The important thing to understand in this part of learning about Money Management is how to determine the amount of risk first before calculating the profit we might get.
Control Emotions
Besides Money Management, another important factor in trading is emotional involvement. If you do not understand it correctly, then it will bring negative effects in trading. Bad money management can destroy your trading, as well as uncontrolled emotions. According to Daily FX, planning out your approach is key if you want to keep negative emotions out of your trading.
For example, you do not understand Money Management well. Thus, there is always a loss in each of our trading positions. It will be difficult for you to not involve emotions when trading.
Conversely, the better you can apply Money Management in trading, the more controlled your emotions will be in dealing with trading results.
Money Management Will Run Well Only If We Master Trading Strategies
If you do not fully master the trading strategies, you are always doubtful when opening a position. Then, the results will not be maximal.
In conclusion, 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 you have mastered and confident in the trading strategies that you use. Thus, you can produce consistent profits in the long run.
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