Forex money management and risk reward
Money management and risk reward are two of the most important factors to long-term trading success. The two go hand in hand with each other because in order to properly understand and implement risk to reward strategies you must correctly manage your money.
• Money management
Amongst other factors, money management encompasses how much you will risk on any on trade. Typically this determination of risk is a function of the amount of money you have in your trading account to begin with. Effective money management also means you are not trading with money you cannot afford to lose, this is a sure fire way to induce emotional trading mistakes and thus blow out your trading account very quickly.
Money management also includes having a plan for what you will do with your trading profits. Will you take them out of your trading account and put them into a savings account or some other conservative long – term investment? Or will you keep the profits in your account and trade larger position sizes as your account grows? All of these factors are very subjective and so they vary greatly from person to person. The bottom line is that you do indeed need a money management plan before you start trading because if you try to figure it out “on the go”, you will likely be another one of the many failed traders out there.
• Risk Reward
Having a thorough understanding of risk to reward ratios is significantly important to your success as a forex trader. Viewing the market from the point of view of risk to reward ratios means you are thinking in probabilities. For example, you might look at a trade setup and say, “I have this much risk on this trade for this much possible reward”. If the reward is at least 1.5 times the risk or greater than the setup might be one to enter into, anything less than a reward that is 1.5 times your risk is simply not worth taking.
Implementation of risk to reward scenarios is HOW you let your winners outpace your losers. When you make 3 or 4 times your risk on every winning trade, you can literally lose on the majority of your trades and STILL profit handsomely. This is how professional forex traders make money, and it is how you can make money in the markets too. Risk to reward scenarios only work however if they are executed on sound trading setups, if you begin over trading by jumping into the market with no real trading edge, you will quickly drain your trading account and thus not allow yourself to correctly harness the power of risk to reward ratios.
Chapter 6: Tracking your results, demo trading, and going live
