FX Money Management Styles and Money Management Methods in Forex Trading - Forex Trading Account Management

Best way to practice successful equity management in forex trading is for an investor to keep losses lower than the profits they make. This is called risk reward ratio.

High Risk to Reward Ratio - Account Management Methods

This risk:reward ratio method is used to increase the profitability of an investment strategy by trading only when you have the potential to make more than 3 times more on a trade than what you are risking on that trade.

If you invest using a high risk-reward ratio of 3:1 or more, you greatly increase your chances of becoming profitable in the long run. Chart below indicates to you how:

Reward : Risk Chart - Funds Management Methods - Account Management - Funds Management Methods

In the first illustration, you as a trader can make the observation that even if you only won 50 % of your trades in your trading account, you would still make a profit of $10,000.

Even if your win rate went lower to about 30% you'd still end up profitable - Account Management Principle - Money Management.

Just remember that whenever you've got a good risk to reward ratio, your chances of being profitable as a trader are much greater even if you have a lower win percentage for your strategy.

Never use a risk to reward ratio where you as a trader can lose more pips one forex trade than you plan to make on that trade. It doesn't make sense to risk $1,000 in order and so as to make only $100 dollars.

Because you have to win 10 times more to make the 1,000 dollars back. If you as a currency trader lose ONLY once you've to give back all your profits for all your 10 trades.

This type of investment trading strategy makes no sense and you'll lose on the long term.

Percentage Risk Method - Account Management Methods

The percent risk method is a method where you risk the same percentage of your account equity balance per every single trade transaction - Account Management Methods.

Percentage risk based money management method says that there will be a certain percentage of your equity balance that is at risk per trade. To calculate the percent risk per each forex transaction, you need to know 2 things, the percentage risk that you've chosen and lot size of an open forex order so as to calculate where to put the stop loss order. Since the risk percent is known, we shall use it to calculate the position size of the trading order to be placed on the market, this is referred to as position size.

Example

If you as trader have an account balance of $50,000 in your account and the risk percent you use is 2%

Then 2 % is equal to $1,000

If three investors buy EURUSD and the first one is using 20 pips stop loss, second one is using 40 points stop loss, third one is using 50 points stop loss, their position size will be:

Example 1:

Stop Loss = 20 pips

Risk percent = 2 % = $1,000 dollars

20 pips = $1,000 dollars

1 point =1,000/20= $50

Position size is 5 lots (for 5 lots 1 point movement =$ 50)

Example 2:

Stoploss = 40 pips

2 % = $1,000

40 pips = $1,000

1 point =1,000/40= $25

Position size is 2.5 lots (for 2.5 lots 1 point movement = $25)

Example 3:

Stop Loss = 50 pips

2 percent = $1,000

50 pips = $1,000

1 point =1,000/50= $20

Position size is 2 lots (for 2 lots 1 point movement =$20)

Example: If an investor with $50,000 wants to calculate annual income from his strategy

Annual income: If your system has a win ratio of 70% and your risk reward is 3:1, and your stop loss is 30 pips and take profit is 90 pips and every month you make 20 transactions forex standard lots, then you maximum annual income will be about:

For 1 standard lot profit per 1 pip is $10

20 transactions*12 months = 240 transactions

Wins and Profit

70% win : 70% of 240 = 168 profitable transactions

168 transactions * 90 pips = 15, 120 pips

15, 120 pips = $151,200

Losses

30% win : 30% of 240 = 72 losing trades

72 transactions * 30 pips = 2, 160 pips

2, 160 pips = $21,600

Net Profit = 15, 120 - 2, 160 = 12, 960 pips

Income: 12, 960 pips = $129,600

The above is just an example, the amount you'll make will depend on the risk: reward ratio of your system along with it's win percentage ratio.

Other factors & aspects to consider include:

Maximum Number of Open FX Trades

A final point to consider is the maximum number of open forex positions that is the maximum number of trade positions that you want to be in at any specified time. This is another factor to decide when managing forex account capital.

If e.g., you choose a 2 %, you might & may also say select to be in a maximum of 5 trades at any one specified time. If you open 4 trade positions & all four of those positions close out at a loss on the same trading day, then you'd have an 8% decrease in your trading account balances that day.

Invest with Sufficient Capital

One of the worst mistakes which traders can make in forex trading is attempting to open a trading account without enough equity.

The forex trader with limited investment capital will be a worried trader, always looking & trying to minimize losses beyond the level of realistic trading, but also will be often taken out of the trade transactions before realizing and getting any form of success out of their trading strategy.

Exercise Discipline

Discipline is most important thing which one can master to so that to become profitable. Discipline is your ability to plan your work and work your plan.

It's the ability to give a trade the time to develop without hastily taking yourself out of the market simply because you're uncomfortable with risk. Discipline is your ability to continue sticking to the trading rules and guidelines of your fx trading plan at all times when trading the market. Do your best to develop the level of discipline that's needed so as to be profitable.

Managing Forex Account Capital Basics - Account Management Basics

Money management, is the foundation of any system as it helps investors to improve their chances to get profits when trading on the market. It's especially key when transacting in the leveraged currency market, which-is considered to probably be one of the more liquid financial trading markets but at same time also one of the riskiest ones.

If you want to invest successfully in the market you should realize that it's very essential to have an effective forex strategy of money management because you'll be using trade leverage to execute your trade orders - Account Management Basics.

The variation between average profits and losses should be strictly calculated, the profit on average should be greater and higher than the losses on average when trading, otherwise forex trading will not yield any profits. In this case a trader has to come up with their own forex account management rules, success of each trader depends on their own individual character traits. Hence, every trader creates his own forex strategy and formulate their own money management rules based on the above rules.

When you're placing your orders put your stop losses so as to avoid huge losses. Stop Loss orders also can be used to lock in the profit.

Consider the chance of getting profit against the chance to get loss as 3:1 - this risk:reward ratio should be more favorable on the profit side.

Considering these forex rules and guidelines, you as a FX trader can use them to improve profitability of your strategy and try to create your own forex strategy which will possibly give you good profits when trading with it.

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