Avoid Forex Gambling – Proper Money Management

A mentor of acquire once taught me, “the difference between wagering and investing is education”. In Forex, possibly more than anything else, this statement stands true. I would poker88 like to add one aspect compared to that statement though. The difference between Forex trading and Forex Wagering is not only education, but proper a money management plan.

So what do i mean when i say “a proper money management plan you may ask? Well, learning how to trade Forex is more than just studying technical analysis, creating a Forex trading system, and trading that system. Even the best Forex trading system will lose with out proper money management. A money management plan is a plan for how the total account balance will be affected but each individual trade in a trading system. Your money management plan gets you through the losing periods and back to winning.

A money management plan should include several key components.

What percent of my overall account balance can i risk on every trade? This number can vary depending on the system and signal types. It should however be consistent across every trade. For instance, lets say you have a moving average system that takes trades off of both a one hour chart and a day chart. The afternoon signals may be higher probability signals but come less often. Your money management rules may call for endangering 1% of the total account balance on every daily signal and 1/2% of the total balance on the hourly signals.
What is my maximum daily and overall maximum drawdown? Some plans look at what a system’s maximum drawdown has been over the last few years as well as the average daily maximum drawdown. The plan then could add a rule that states I will stop trading today if my account balance draws down 2%. If the system overall draws down more than 25% whenever I will stop trading. This is your maximum risk limit. A daily maximum helps you stop trading when emotions may get the best of you and the overall maximum drawdown helps you determine at what point I may need to reassess the effectiveness of my system.
At what periods can i withdraw profits from my account? I am not talking about taking profit on individual trades. I am talking about actually pulling profits from your trading account. Pulling profits must be balanced with compounding profits. There is a delicate balance between the rule as to when profits should be taken depends on the investor and his/her trading strategy. My Forex money management plan calls for withdrawing 50% of profits on a quarterly basis. Some may take profits monthly while others yearly.
What is my maximum Margin level? This refers to over trading. Some traders may think, I have all this available margin, why not use it? This can be a dangerous mentality though. Every dollar margined puts vulnerable the overall balance of the account. You can create money faster but you Will lose it faster. Using too much of your available margin puts you in the realm of wagering. Markets can move quickly and even if you have a stop-loss that is suppose to keep you from losing more than a small percent of your account balance, drastic news could move a currency far past your stop-loss providing a much larger loss than your money management plan had anticipated. Keep at least 50% of your margin available for use. Never trade less than $1000 with a small account, $10000 with a mini account, and $100, 000 with a standard account. Your money management plan should have rules in place in the event margin falls below certain levels.
These are just a few of the components that make up a proper money management plan. In short, your plan should determine how much you will risk and with how much you will trade every trade. Following a well written, well thought out plan will help you be a successful Forex trader rather than a risk taking Forex gambler.

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