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.
