Whenever dealing with a stock portfolio you will be advised to focus on diversity. This means that you should invest in some solid stocks, a part of the money in small cap stocks, maybe trade bonds and so on. High risk portfolios will usually be made out of larger portions for stocks that are “up and coming”. Even when you are dealing with a large portfolio, you will rarely notice stocks end up with a value of zero. There is also no leverage to cause losses.
When dealing with forex trading things are different. It is really common to receive a margin call. Most of the traders are losing money and few people actually manage to withdraw funds when bad trades happen. It is actually really common to lose all the money fast.
But when we talk about money management we like to talk about forex. More than 95% of all traders lose money in forex trading because they don’t know how to money management look like. In this video you will get full explanation about forex trading money management.
See this excellent Forex Money Management video which is made by Dailyfx team :
In this video you can see simply and nice conclusion. This 5 points in conclusion you need to know !
The huge difference that appears between forex trading and the stocks market is mainly caused by bad money management. In most situations the reason attached is the leverage, which is too high. Let us clarify this concept. Brokers are right to allow a high use of leverage. We see NFA limiting trades at a 100 to 1 leverage, which is acceptable. The CFTC proposed 10 to 1 leverage limit is just not going to work in forex trading.
What few people understand is the fact that although high leverage exists, it is not an obligation to use it. The most important rule in money management is to risk only a portion of the money that you have in a single trade. In the event that you deposit small amounts in forex accounts you should be prepared to accept trading sessions with amounts that are lower and work with trades that have lower leverage.
Brokers are always influencing money management. If they put a big focus on a high leverage then they do not contribute to industry maturity. Most people that will open small accounts and will use high leverage will end up losing the money. These are the individuals that tell others to avoid the forex market. A trader that will use small leverage is going to make a lot more trades and will have a chance to learn how to succeed even if they will lose some trades.
The traders that are going to trade for longer periods of time will have a very good chance to withdraw profits from a broker account and they are also going to recommend forex trading as a great way to make money, which is profitable for the entire market.
It is also important for website owners to be educated on forex trading. You will find a lot of technical analysis online but you should also focus on articles that talk about trade psychology. Money management is never discussed openly but you need to learn how to manage the money that you can trade with in order to be successful.
Forex Money Management
Handing over a winning trade to two opposing amateur traders will somehow end in both losing money. While the same trade when played by two opposing experienced traders, both will win money. The skill that sets the amateur and pro traders apart is the skill of money management. As it requires one to monitor trading positions constantly it becomes boring for traders who start ending in losses. They don’t realize that taking losses can pretty much end a trading career. A return of 100% is required to only fill for the loss of 50% on one’s equity.
The Big One: Trading literature is cramming with incidents where profits collected over extensive periods of time are lost in a matter of days. The reason is mostly due lack of discipline rendering swampy money management. By the advent of FX trading, the urgency of chasing the dream of one big win has increased and it often lands the amateur traders into one big loss and that is pretty much the end of them as traders.
Learning through Lessons: To avoid losing it all in one single blow, it is generally advised to go for “stop losses”. It is ill-advised to risk investment beyond 1% of the overall equity on any trade. Using this strategy, the trader does not get serious blows in case of losses. Say like even after losing 20 trades, he might still have 80 percent of the equity with himself.
Truth is that unlike a few mature minded traders, most traders will take the advice seriously only after a self experience of money loss. And since for the first few times traders generally do go through losses, so they should start with a capital one fifth of an amount loosing which would not uproot their entire life. This would be a good strategy even for trading FX.
Money Management Styles
Proficient money management can be practiced by two methods;
1. by making many small stops concentrating on a few large winning trades or
2. by making a occasional yet large stops earning gain from many small trades with the thought of compensating for a few yet greater losses.
Which of the two methods you choose depends on your individuality. FX being a spread based market works out for both methods of trading as the transaction costs are the same despite the traders’ position size.
Four Types of Stops: For money management, knowing about the following four stops will be helpful in your trading career.
1. Equity Stop: For any trade the trader does not take a risk beyond a preset amount (1 – 5% at most). This way you can go through numerous losses without completely blowing away the equity and can stop in time.
2. Chart Stop: Combining the technical analysis of the price movement from the charts and the indication signals with the equity stop rule, technical traders devise the chart stops.
3. Volatility Stop: Volatility (may be measured using Bollinger Bands) is employed for setting risk parameters. Trader is required to increase risk (not more than 2%) during high volatility (wide price range traversals) to escape the intra-market noise. Risk parameter would be set small in the opposite scenario. Lot sizes should be small enough in contrast to the accumulated risk in the trade.
4. Margin Stop: This is an efficacious method in FX trading. The capital is required to be dissected equally into 10 parts. This prevents the trader from losing the entire capital to merely one trade irrespective of the leverage amount set and can try his luck at without a care of setting manual stops.
Many management techniques are flexible in the FX market and success can be attained provided that you actually practice them.