2Bull Forex Blog

Most traders see forex money management as little more than placing a stop but it’s a lot more than that here we will look at money management mistakes and how to avoid them.

1. Trading invalid Time Frames

It doesn’t matter how good your system is, if the time frame is to short you are trying to trade in - you won’t win. Retail traders think they can cut risk by forex day trading or scalping, the theory is it means low risk.

The reality is it’s the highest risk form of trading because - daily volatility is random and your odds on to lose.

Don’t fall for the myth of people who try and tell you day trading works - it doesn’t sure, you see loads of simulated track records in hindsight from vendors but there is big difference between making money knowing the closing prices and not knowing them.

2. Cut Trading Frequency & Risk More

It’s a fact most traders think the more they trade the more they make however the opposite is true, trade to much and you end up taking risks on marginal trades.

The fact is you can trade less than a dozen times a year and make 100% + gains. You don’t get rewarded for frequency, you get rewarded for being right with your trading signal so, cut back your trading and then do this:

Risk as much as you can afford on the highs odds trades. Your better off risking 10 - 20% of your equity on these than the normal recommended 2 % on lots of marginal trades. Keep in mind if you don’t risk much you won’t make much, you need to take calculated risks at the right time - Now finally, and you need to avoid this:

Diversification! Sure it spreads your risk but in most instances it dilutes your gains to nothing on a small account. If you have a high odds trade you believe in don’t dilute your profit potential.

3. Stops within Random Volatility

Many traders want to restrict risk by locking in profit by trailing a stop - sound theory but the way NOT to do it is to put stops within random volatility. Don’t know what random volatility is? Then you need an understanding of standard deviation of price so make part of your essential forex education.

In essence you need to keep your stop far enough but to keep you in the trade yet close enough to protect you - most traders get this wrong. They trail there stop to close and rather than making a huge profit - they bank a marginal one.

When the big trends come around - you milk them not for hundreds but thousands or tens of thousands. Big trends are there - look at any forex chart your challenge is to turn them into profit.

If you thought this article was going to show you a way to take miniscule risks then you may be disappointed but the reality is:

Forex trading is high risk and your forex money management strategy should be all about taking calculated risks at the right time and making huge gains.

If you want low risk put your money on deposit - if you want to take calculated risks for triple digit gains, the above tips can help you.

Here we will give you three simple steps to making money with forex charts. Anyone can learn forex charting and it represents a time efficient and profitable way of trading.

Here we are going to look at charting the longer term trends that yield the big profits and these trends can last for week’s months or years and can be very profitable.

Avoid trading low odds trades in short time frames and day trading ( the most popular method for novices) is compete waste of time, as you can never get the odds in your favour.

Be patient and wait for the high odds trades and they can’t be forced and don’t come around everyday.

Right, let’s look at forex charting for beginners and how to pile up some big profits quickly, with a simple robust system.

Step 1 - Getting a Robust Forex Trading System

The first think you need to do is construct a simple trading system and it only needs to be a few indicators, combined with support and resistance.

Simple systems work best. There more robust than complicated ones and have fewer elements to break in the brutal, hard world, of real trading.

Start with a breakout system. This is buying new market highs - it’s a fact that most major forex moves start from new market highs NOT market lows.

A breakout should be past at least 2 x tests of resistance and the more the better and wider they are apart the better too.

Most traders hate breakout trading that’s why its so effective - they want to wait for the pullback - but they wait in vain as the price accelerates away and their not in.

Step 2 - Confirming the Trade

Once you have a breakout you need to confirm that price velocity and momentum is going to carry prices forward and here you need to learn about leading momentum indicators.

We have covered these fully in our other articles and they will help you put the odds on your side.

Step 3 - Money Management

With breakout trading money management is simple - your stop goes just below the breakout point and as the trend unfolds you need to lock in profit but be careful!

Most traders make the mistake of locking in profit to quickly and your forex trading strategy must give the market room to breathe. Don’t aim for perfection or trying to second guess the market; act on the reality of price change and trail your stop way behind normal market volatility.

You must learn to do the above and be disciplined or you will never make any real money.

Putting it all Together

The above sounds simple and it is. In fact, anyone can learn to trade forex the hard part is applying your method with discipline. You need to take losses and calculated profits when your charts tell you and ride the trends with discipline.

The method above works and will continue to work as it’s based on sound logic and your challenge to acquire the discipline to apply it to make big forex profits.

If you want to win at forex trading longer term money management is something you must consider. When dealing on leverage, you need to protect what you have - if you don’t you will get wiped out.

Many traders make basic errors when trading and here we will look at them and give you simple tips to avoid the errors and increase your overall profitability.

1. Not Understanding Standard Deviation of Price

Ask most forex traders do they understand the above and you will be met with a blank look yet, it’s essential to understand it and volatility, otherwise you will never know how to place stops in places where the odds are in your favour.

If you don’t know what the above is, make it an essential part of your forex education as you really need to place and trail stops behind random volatility.

Placing a stop close may appear good risk control - but if the chances are high it will be hit, then you have simply gained nothing. By trying to avoid risk you can actually create it.

2. Do Leverage

As you will have to have stops outside of random volatility you will need to do leverage. Many traders are in a hurry to make money and leverage up to high put the stop to close and get hit. You need to give the market room to breathe and that means wider stops and lower leverage.

3. Trade Breakouts

If you only trade valid breakouts you have a great method of risk control and an obvious stop ( below the breakout point) and if you are selective in the breakouts you take the odds of success are even higher which leads to the next trading tip.

4. Cut Your Trading Frequency!

If you only focus on high odds big breaks then the odds are on your side even more and your stops are less likely to be hit. I know traders who trade no more than once a month but make triple digit gains.

You don’t get paid for trading often in forex trading you get paid for being right - that’s all.

5. Trailing a Stop

Most traders get so excited that they have a profit they can’t bare to give any of it back so what do they do?

They bring the stop to close and get stopped out by random volatility and lose.

If you want to make money you have to take calculated risks and if you want to run big trends keep your stop well back.

A good level to trade is a close behind a significant moving average and the 40 day is a good one. Sure you will give a bit back but that’s inevitable but this method will keep you with the big trends longer.

6. Buy Options!

If you want to deal with volatility and get staying power then consider options as that’s what they give you - the ability to ride out short term volatility and providing the market trades in the money before expiry you have a gain.

The only point to keep in mind is when placing options trades and buying them to get plenty of time on your side and buy at or in the money puts and calls.

Forex money management is all about taking calculated risks at the right time and defending what you have - volatility is your enemy. Most traders can spot trade direction but fail to stay with trades simply because they can’t get their money management right.

If you follow the above tips you will take calculated risks at the right time and be able to handle and cope with volatility and seek bigger longer term gains.

Many traders think that accepting losses is hard but it’s not nearly as hard as accepting big profits. When you are engaged in forex money management your profits need to exceed your losses so you need to maximize them- so why do most traders have a problem surly we all want big gains? We do but:

Most traders have a psychological problem in running profits.

The typical forex trader gets a profit and feels pleased. The bigger it gets though, the more tempted he is to take it. Swings in price go back against his position and eats his open equity and this causes emotional problems.

The bigger the profit becomes the more tempted the trader is to take it. The trader ends up snatching the profit early, as open equity swings cause him to panic and he banks it and then what happens?

The trade continues the way he thought and goes on to pile up $10, 20 30,000 or more and he’s not in.

Its hard holding a profit in a long term trend and taking short term swings against you, by sometimes thousands a day - but if you want to catch and hold the long term trends that’s what you have to do.

It requires total understanding of your trading system and confidence in it - and this is why most traders can’t do it they are emotional “shoot from the hip” traders or following a guru.

A good forex trading system will normally win 30 - 50% of the time (forget the traders who claim 90% their lying) so your losers will be normally more or the at the same level as your profits. So you need to have a profit 3 - 5 times bigger than your loss to make good profits on your overall trading account.

Most traders simply don’t have the patience and discipline to follow long term trends but you must to win. However, look at the major forex trends and you will see they last for months or years and can make you rich - IF you can lock into and hold them.

Many forex traders simply can’t cope with trend following so they try day trading and vendors present it as way to scalp small profits and build them over time - good story, doesn’t work. Day trading is a loser’s game as all short term volatility is random.

If you find long term trend following to stressful, try forex swing trading as profits and loses come quickly and you don’t need to endure the open equity dips you do in trend following.

If you’re a novice cut your teeth on swing trading and build up your confidence and discipline to try long term trend following - if you can catch these trends, accept open equity dips and keep your eyes on the end prize, you could make huge profits.

Trend following is hard but very lucrative - if you have the mindset you can turn these trends into huge profits and understand forex money management is not just about taking losses its also about accepting big profits to.

Many traders are right about market direction but simply put their stops in the wrong place and clipped out the trade and then watch as it goes onto make thousands of dollars and their not in! Placing stops is as important as picking trade direction in terms of making Profits.

Risk and Trading.

Most traders try so hard to restrict risk they actually create it. A great example of this is forex day trading where you have tight stops by predicting the daily range.

Te problem is all movements within a day are random and the apparent small risk is a guaranteed lose as volatility is random and takes them out.

There is a big industry in telling you that forex can be traded safely – Rubbish! It’s risky and if you don’t like taking calculated risks put your money in a high interest account.

To make big returns, you have to take risk that’s simply the reality of trading.

Placing Stops

Place stops behind heavy valid resistance or support – that means if they trade recoils back you may be out but your stop is in a logical area. Another point to keep in mind is to use a stop close ( I use New York stock exchange times ) this means that you have more chance of winning it may look more risky but longer term its not.

How often do you see stops picked off in the day session for the market to settle back the way you thought? It happens often so don’t do what the majority do run a stop close if you can keep an eye on the market.

Moving stops

Beware of moving stops to closely – if you try and lock into quickly you will get taken out by normal volatility. Hold your stop back and make sure you have the discipline to take dips in open equity and keep your eye on the bigger prize. Accept that you’re never going to sell the top and buy the bottom, but if you get 70% of the big trends you will pile up profits.

Be selective

Only trade those trades that have high odds chance of winning forget trading frequently you don’t get paid for that you get paid for being RIGHT and that’s all.

If you are selective you can risk more on these trades and give yourself a bigger chance of winning. Never fall for the risk reward of trade is your profit target, your stop – its NOT.

This is just your view and bears no relation to the trade’s outcome.

Don’t Diversify

If you have a big account fair enough but if you have a small account diversification simply dilutes your profit potential and ensures you make mediocre gains. On a small account load the trade and risk as much as you can.

Be realistic

There is a big difference between taking calculated risks and being rash. Do not over leverage your trades. Keep in mind the best traders in the world make 100% and if you made that to then you would compound a lot of money over time. Don’t go for broke and get blown out.

Money management and stop loss placement is all about trading the high odds trades at the right time, placing stops and trailing them logically not to get taken out by volatility and loading the trades with the best potential.

If you do the above you will have a simple way of taking calculated risks and getting handsome returns and that’s what Forex trading is all about.