Thursday, 25 December 2014

Forex Money Management - Growing Your Returns Exponentially


Online_Trading 15

Basic Trading Concepts Defined


Did you know that you can lose huge sums of money trading Forex, even if you have a profitable Forex trading system? Contrary to what most Forex traders believe, a profitable Forex trading system is not the be all and end all of successfully trading Forex. The secret to keeping your trading account safe and growing your returns exponentially at the same time is the little known practice of Forex trading money management.


What Is Forex Trading Money Management?

Forex trading money management is basically how much you should risk on each trade, and there are many different money management strategies out there. One popular example that you will hear about often is the 2% rule, which states that you should not risk more than 2% of your trading capital on any one trade. Most people get confused with this definition because they confuse margin with risk per trade, so I'll explain it in a different way: if you're using the 2% rule, then you should size your positions in such a way that you will not lose more than 2% of your capital in any given trade. For example, if your stop is 10 pips away, and 2% of your capital is $200, then you should only take 2 contracts (2 Contracts x $10 per pip x 10 pips = $200 risk per trade)


The Limitations Of Traditional Forex Trading Money Management

Most people follow the 2% rule religiously without knowing why they are meant to do it. I personally believe in knowing why I'm doing something before I do it, so researched this thoroughly. Turns out that if you want to minimize the risk of blowing your trading account while maximizing your trading profits in the long run, then you'll want to keep your risk per trade to between 2-4 % of your trading capital. Depending on your own tolerance for risk, you can actually go up to 3% or even 4% to ramp up your profits even further, without greatly increasing your risks.


Profitable Money Management Method

The 2-4% Forex trading money management model is a type of geometric money management technique, and is the most efficient way of growing your capital when trading Forex. Traditionally, people apply Forex trading money management using a fixed contract sizes, which is good for small accounts but not very efficient. The reason why the 2-4% rule is so powerful is because it allows you to apply the power of compounding to your trading. As you gain profits, you reinvest it over and over again, which creates an exponential growth rate in your trading account. I'm sure you'll agree that when it comes to your trading profits, an exponential increase is far better than a linear increase.


The Power Of The 2-4% Rule

There are two ways of applying the 2-4% rule. One is to update your position sizes at the end of regular time intervals, and the other is to update your position sizes at specific profit/loss milestones. Regardless of which method you apply, it's clear that the 2-4% rule is powerful because it creates the fastest and safest growth of your trading account. Obviously, you will need a profitable Forex trading system to apply this Forex trading money management strategy successfully. Once you have these two components in place, then there's really nothing stopping you from creating a consistent Forex passive income that grows and grows over time!

Reference: Ezine articles.

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