Forex Money Management Strategies – Quick Guide

It doesn’t matter how good your strategy is; if you don’t have good business capital management skills, you will lose money. A good money management strategy will enable you to withstand losses and take advantage of big winners to make it profitable.

Forex Money Management Strategies

Only Risk Money You Can Afford to Lose

It goes without saying, but it is not always followed. Trading may be risky, and you should only risk losses that you can afford. If you have to use money that must be used for daily expenses, or if you are using a loan or credit card, you are at risk of losing funds that you cannot afford. Therefore, when you use funds that cannot afford to lose, you will make wrong business decisions and constantly worry about the loss.

Use a Stop Loss

This is another simple strategy that should always be followed, but it is not the case. Using a smart stop-loss can ensure that you make a small loss and then profit from the winner. The best stop-loss position will be at the position where the trade fails, instead of suffering huge losses, but quickly shorting.

use stop loss 

Calculate Your Risk for Each Trade

By correctly calculating the risk of each transaction, you can ensure that the amount of risk you assume is correct. For example, some traders do not calculate how much each transaction should be traded but use the same amount. If you do this, you may take very different risks in different currency pairs and stop-loss levels. The best way to control risk is to make rules. For example, you only assume 2% of the account risk in each transaction. Before each transaction, use the position size calculator to calculate how much you should trade so that you don’t take too much risk.

Money Management Strategies for Serious Traders

If you are a serious trader, you have to look for other more advanced strategies to ensure that your losses are kept within a small range and your winners provide you with profits.

Have a Minimum Risk-Reward Ratio

The lowest risk-reward ratio for each trade you make will ensure that you can make a profit even after losing money.
 
In the example below, we have a long breakout trade. If the price drops to our stop loss level, we will automatically stop trading, but in this example, the price is going higher, and we can make a profit four times the amount of risk or a 4:1 risk reward. This means that if we take a 2% risk in the trade, we will get an 8% profit.

minimum risk reward ratio

Use Leverage Wisely

Leverage is a double-edged sword. You can use it to push your winner to a bigger winner, but if used incorrectly, it will quickly ruin your account. The best way to ensure that you do not use too much leverage is to calculate the size of the transaction to be used before each time.
 
In the above example, if we want to take a 2% risk in each trade, we can use a Position Size Calculator before starting a new trade. As our account grows or shrinks, we will continue to take the 2% risk and ensure that we do not use too much leverage.

Follow Currency Correlation

If you trade more than one pair, Correlation in the foreign exchange market is something you should always consider. If you use correlation unwisely, you will soon risk more than you want. For example, EURUSD and GBPUSD can have a correlation of up to 90% in the daily time frame. Therefore, if you trade on two foreign exchange pairs, they are likely to move in the same direction. This means you will have two profitable trades or two losing trades.

Forex Money Management Plan

The best way to ensure that you keep up with your money management strategy is to develop a clear set of rules and a money management plan.

Calculate Your Acceptable Risk Per Trade

There are two commonly used methods to calculate how much risk you want to take on each trade. The first is the fixed percentage method. Using this method, you can decide what percentage of risk you want to take on each trade, such as 2%, and continue to take the 2% risk as your account gets larger or smaller. The second method is the fixed currency method. Using this method, you don’t need to use a certain percentage of your account, but instead, assume the same amount of risk in every trade. For example, you can have an account of $5,000 and choose to assume a risk of $250 in each trade.

Calculate What Your Maximum Account Drawdown is

Knowing and using smart drawdown levels can help you avoid bankruptcy of your account or spend a lot of money on it. You might decide that if you lose 25% of your account, it’s time to take a break and find out what the problem is. Before returning to the real account, you may decide to return to the demo account to find out the mistakes you made.
 
Setting a drawdown level where you will have a resting time can help you have a clear rule set around when it’s time to stop risking real money.

Create a Ruleset for How You Take Profit and Use Your Stop Loss

Many traders have clear rules for the trades they are about to carry out, but they do not have clear stop loss and take profit rules. You can only make money or lose money when you close the trade, so it is important to have a clear set of rules outlining how to make money or reduce losses. This set of rules can help you minimize losses and take advantage of big winners.

Create a Money Management Plan and Follow it

The best trading plan will be written with a clear set of rules, which you can easily follow. Your money management plan should include the following rules:
 
The leverage you use, what your risk percentage or amount is, and what is your acceptable account drawdown is. What is the lowest risk-reward you will try to achieve for each trade? How will you use correlation? How will you set your take profit and stop-loss levels?