Forex Money Management
Learn to control risks in trade. Forex smart money management
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2. Returning the lost capital is harder that it seems to
Now, here is a challenge: try on your demo account to gain a return of 300% or at least 100% of your original account trading as it were the real money. Will that be easy? I don't think so. Can you prove me wrong?
3. Calculate risk / reward ratio before entering a tradeWhen chances to win in a trade are smaller than potential losses, don't trade! Remember — staying aside is a position.
both examples are showing a bad risk management.
Before entering a trade, reassure that risk / reward ratio is at least 1:2 (but ideally 1:3 or higher), which means that chances to lose are tree times less than promises to win. For example: 30 pips of a possible loss versus 100 pips of a potential win is a good trade to consider taking.
Adopting this money management rule as a must, in the long run it will dramatically increase your chances to succeed in making stable profits.
Next chart shows the risk / reward rule in practice.
10 trades with 1:3 risk / reward ratio were conducted.
As we can see, using 1:3 risk / reward ratio constantly and being successful only 50% of the time, anyone can make a profit in the end. The higher the reward ratio (compared to the risk ratio) the better are chances to end up in profit.
4. Learn to use protective stops
Continue reading about protective stops and their importance for good money management: Learn to use Stop Loss effectively