The Authority’ on Price Action Trading. In 2016, Nial won the Million Dollar Trader Competition. This could possibly be the most important Forex trading article forex 1 pip value gold ever read. Money management in Forex trading is the term given to describe the various aspects of managing your risk and reward on every trade you make.
If you don’t fully understand the implications of money management as well as how to actually implement money management techniques, you have a very slim chance of becoming a consistently profitable trader. However, many traders do not completely grasp how to fully take advantage of the power of risk reward. Every trader in the market wants to maximize their rewards and minimize their risks. This is the basic building block to becoming a consistently profitable trader. Many traders do not take full advantage of the power of risk reward because they don’t have the patience to consistently execute a large enough series of trades in order to realize what risk reward can actually do. Risk reward does not mean simply calculating the risk and reward on a trade, it means understanding that by achieving 2 to 3 times risk or more on all your winning trades, you should be able to make money over a series of trades even if you lose the majority of the time.
We can see in the chart below there was an obvious pin bar that formed from support in an up-trending market, so the price action signal was solid. Now, with a reward of 3 times risk, how many trades can we lose out of a series of 25 and STILL make money? You might get 18 losers in a row before the 7 winners pop up, that is unlikely, but it IS possible. Unfortunately, most traders are either too emotionally undisciplined to implement risk reward correctly, or they don’t know how to. Meddling in your trades by moving stops further from entry or not taking logical 2 or 3 R profits as they present themselves are two big mistakes traders make. They also tend to take profits of 1R or smaller, this only means you have to win a much higher percentage of your trades to make money over the long-run.
Position Sizing Position sizing is the term given to the process of adjusting the number of lots you trade to meet your pre-determined risk amount and stop loss distance. That is a bit of a loaded sentence for the newbie’s. So, let’s break it down piece by piece. COMFORTABLE WITH LOSING on the trade setup.
This is not something you should take lightly. Find the most logical place to put your stop loss. The three steps above describe how to properly use position sizing. ALWAYS adjust your position size to meet your pre-defined risk and logical stop loss placement. This is VERY IMPORTANT, read it again. For example, just because you have to have a wider stop on a trade doesn’t mean you need to risk more money on it, and just because you can have a smaller stop on a trade does not mean you will risk less money it. You adjust your position size to meet your pre-determined risk amount, no matter how big or small your stop loss is.
Let’s take a look at the current daily chart of the EURUSD below. A trader predetermines how much money they are comfortable with potentially losing per trade and risks that same amount on every trade until they decide to change their risk. I argued that using a fixed dollar amount of risk is superior to the percent of account risk model. I trade and it’s how many others I know trade.
Risk Let’s take a look at a hypothetical example of 25 trades. Many professional traders use the fixed dollar risk method because they know that they have mastered their forex trading strategy, they don’t over-trade, and they don’t over-leverage, so they can safely risk a set amount they are comfortable with losing on any trade. Conclusion To succeed at trading the Forex markets, you need to not only thoroughly understand risk reward, position sizing, and risk amount per trade, you also need to consistently execute each of these aspects of money management in combination with a highly effective yet simple to understand trading strategy like price action. This is a great ARTICLE and i will for sure follow your advice. I am also bussy reading all other articles. When I started with trading a year ago MM was my worst favorite topic. Thanks Neil, you made it simple to understand.