Tuesday, March 25, 2008

Forex Trading And Money Management

The key to huge gains when trading forex with leverage is to make sure you have a specific forex money management system in place. Very few traders pay much attention to money management but it's vital for success and it's much more than simply placing a stop.

Here are some simple tips on money management that will allow you to defend what you have and stay in the game to hit and hold the big profitable trades.

Money Management on Your Overall Account

You should always see the risk you take on a trade in relation to your overall account.

If you have some profit its easier to lose that psychologically than your core equity. If you doing well then increase your bet size - f your not doing so well you decrease it.

It's a fact that poker players make great traders and the reason for this is they know how and when good times to vary their betting style are.

You should not bet the same size all the time forex trading is all about taking calculated risks at the right time and if you have the trading signal and the trade looks right bet as much as you can afford.

If you make a lot of money quickly, don't be afraid to put some money in the bank and liquidate your position or take partial profits.

Monitor your overall equity all the time.

Stop losses

Each and every trade should have a stop loss which is your get out point, should the position go against you. If you assume you are wrong from the start things can only get better!

Understand Random Volatility

When you place a stop you must NOT Place your stop in areas of random volatility.

This is a common mistake traders place their stops close to their entry point thinking it gives them less risk. On paper it does, in reality it means random volatility stops them out - this is why forex day traders always lose. If you want to understand random volatility you need to learn about standard deviation of price. We don't have time to discuss it fully in this article but we have covered it fully in other articles so look them up.

Place your stop where if it's taken out a lot of other traders will be to i.e its valid support or resistance.

When trailing stops don't be to keen to get them to close once your past breakeven if you are following long term trends keep the stop behind random volatility.

The enemy of all forex traders is volatility - spotting the trend direction most of the time is easy getting in at the best risk reward is difficult. You need to strike a balance your stop must not be to close but close enough!

Trade Breakouts

A good way to trade is to trade breakouts and stop protection is self explanatory behind the breakout point and if you only trade valid breakouts you will have the odds on your side.

Money management is far harder in my view than picking trend direction. I very often get that right, only to see my position stopped out and then reverse and go back the way I thought!

Defend Core Equity at ALL Costs

My own view on money management is to defend my core equity and see everything in relation to how it moves. I risk more when I am doing well and am never afraid to bank money in to keep my equity curve smooth. On placing stops I always make sure there outside of random volatility and in logical places where if I am stopped out a lot of other people will be to.

Forex money management is the key to longer term gains and a trader once said to me (and he's right) If you concentrate on defending what you have above all else the profits will take care of themselves.

Means Of Money Management For Kids Through Credit Cards

It's never too soon to talk to kids about money, and as for a card, it's best to start them on one before they leave home, say perhaps when they are a junior or senior in high school. Let me give an example.

Before my daughter left for college, she got a checking account, linked to her parents (of course), and then later a credit card with a very low limit. The idea here was for her to learn to pay for things herself before she got out into the big bad world on her own. I like starting them on these things while they're still under their parents' roof, so they get practice, and when they decide on the $125 jeans, and then realize there isn't enough dough left for lunch and gas money, guess what? They brown bag it to school and take the bus! Or they ride with friends, etc. There's no harm in their experiencing the consequences of overspending while they are with you, and their limit is low.

You can get a card with just a few hundred dollars limit, and then help them pay it off in full and on time every month. This is actually very good because it builds good credit, it gives them practice, and they feel like a big shot! Not only that, they aren't constantly asking you for $20 to cover the pizza fund. Well, probably they are still asking, but at least your child can see how far a finite amount of money goes, and learn to adjust, or not!

Another good practice for them is when they lose a card. Sooner or later they will, and you can show them the process of quickly calling their card company and getting the card canceled. Don't be too judgmental with them at first. They are going to make some interesting decisions, and that is good, because you are there to help out if and when trouble comes.

Another option is having a cash credit card. This is where you personally dump a certain amount of money onto a card, and then when the limit is spent, that is it. Your child doesn't actually have a line of credit anywhere, but the experience is very similar in terms of using the card around town. I know a couple who would add a couple hundred dollars or so every month onto their son's card, and then he was responsible for his expenses that month. I think this is a great idea as a precursor to actually having a credit card. You could do this at 16 years old, and then move up to a credit card afterwards.

Much in the way there is no magic number regarding allowance, there is no magic age for this to begin. It has a lot to do with your child's maturity and impulsiveness. Most kids think it is very cool to have their own card, and they usually can't wait to be in charge of their own money, because they typically believe their parents are holding out on them. There is only one way for them to understand that when the money is gone, and it is only the middle of the month, that they now just have to make do until the next pay period. Trust me. You can preach and holler till you're blue in the face, but not one of us is capable of understanding this until we experience it for ourselves.

One last benefit of them having their own card, is that their expenses are itemized for them, and this is priceless! They will tell you, themselves, their pastor, rabbi and creditor that they "didn't buy anything!", and can't understand why the stupid credit card company is being so mean and actually froze their card because they went over the limit. Ahahahahahhaha. It's so cute to see their little eyes bug out of their heads as they scan the bill and find all their merry little spending sprees spelled out for them, one after another, as they wail "Oh, I forgot all about that one!" The final beauty of this is that you don't have to say a word, since it's all there in black and white.

So always bring money into the conversation with kids, but keep it short and sweet for the most part. A long exegesis is the short way to turning them off, so just make sure they know the basics and that they see you have a good attitude about money. Remember, their emotional intelligence is superior to yours, and they can sniff your fear and loathing a mile away, if that is what you're bringing to money. As Catherine Aird said, "If you can't be a good example, then you'll just have to be a horrible warning." Well, it's never too late to learn, and there's no harm in learning even as you teach your child.

Kids want the independence, but they rely on you to keep them safe as they learn. Check out cardratings.com to find the best cards compared side by side. Remember to get a low limit ~ just a few hundred to start ~ and don't pay an annual fee, and get a low rate.