Money Management A Day Traders Key to Success
Money Management – A Day Traders Key To Success
No matter how successful a forex day trading strategy may be, you must practice sound money management to day trade the forex market profitably and more importantly to be around for the “long haul”! Anyone or any system can have a string of winners. A time when you the trader feel invincible, you might even feel like all your forex woes have been solved! But then what happens? Inevitable you experience a string of losing trades as any system does. You see, even with a winning percentage of 75% you can still mathematically have 10 losers or more in a row. When you flip a coin the previous flip does not have a bearing on the next, neither do previous trades out comes dictate the odds on the next trade, it is in fact completely separate from all previous trades. Knowing this you have to prepare for the worst, you have to be around long enough to realize your dreams of making a living in the forex market and the key to that is proper money management.
So lets discuss proper money management as it applies to day trading forex. Without a doubt the first step is selecting a standard risk management per trade the fits you and your trading style. Most pro forex traders recommend risking no more than 2% of your entire account on any one given trade setup. So if you have a 10K account you would risk no more than $200 on any one trade. If you are entering a trade and need a 20 pip stop you can safely use 1 standard lot (20 pips X $10 per pip = $200). If you are using a 40 pip stop the lot size would be cut in half to 5 mini lots and you would still be risking 2% (40 pips X $5 per pip = $200).
Lets examine now the psychological effect of trading and how proper money management plays a role in your trading decisions. Using a safe risk per trade such as 2% allows you to be emotionally detached from any one given trade, thus allowing you to make clear decisions on your entries and exits which increases your odds of making a successful trade and managing it properly. It also allows you to work through the draw downs with the confidence to stick to the rules of your forex trading strategy and know that the proper money management will pull you out and allow the profitable system to get back to overall profit.
Every trader goes through trades where they over leverage only to see the trade head against them. What does that feel like? Palms are sweating, your heart is racing, and god forbid you try to sleep! When you enter the trade knowing the worst thing that can happen is you lose 2% of your account, you quite simply will not have those troubles. Your head will be clear to examine the market for an entry signal, and equally important you will be able to manage a running trade without the emotions of fear and greed pumping vigorously through your veins. You see money management not only protects you from huge losses, it enables you to make logical trading decisions based on facts not fear and thus increases profitability.
Above all the main goal of most everyone who begins to trade in the forex market is to make this a full time career. Still there are some that simply want to supplement their income. No matter what category you fall into, you no doubt want long term success, not simply a lucky month or two. You can however enter trades with high risk and think of this market as a casino but I can assure you this method will lead to the fast demise of your account. You will be able to day trade and scalp the forex market for years to come, so why rush it with unnecessary risk when you can gain slowly overtime and actually give yourself a chance for success? Patience will allow you to apply the proper money management and will propel you toward steady success in the long run! If you would like to learn more about proper risk management as well as money management you are welcome to check out our forex course and members trading forum. See you there, until then happy trading!