Free Forex Course

course progress unlockSign up for free to unlock:

Lesson Tracking
Lesson Quizzes
Lesson Videos
Course Certificate


Free Forex Course

course progress unlockSign up for free to unlock:

Lesson Tracking
Lesson Quizzes
Lesson Videos
Course Certificate

progress-tracking-sidebar

35 of 37

Lessons Completed

Sign-Up-to-Unlock

In the last lesson we learnt what money management is, and why it is such an important part of a traders set-up. 

 

Lets explore different money management strategies that traders commonly use to maximise profits and limit losses.

 

fixed percentageA popular strategy utilised by retail Forex traders is the ‘fixed percentage method‘. This is a money management strategy of risking the same percentage of your equity on every trade that you make. This does not change whether you have a 20 PIP stop-loss or a 200 PIP stop-loss.

For example, Trader A may always look to risk 2.5% of their equity on every trade. You would need to work out what this risk would be in terms of placing your stop-loss, something that we learnt back in step 2.

The reason why this is a popular money management strategy is because it helps to limit a traders loss, avoiding them from blowing their account. In a scenario of a losing streak, the money that the trader risks incrementally decreases due to a decrease in account equity.

 

For example, if the trader risks 10% or £100 and lost, they will end up with £90, they will then risk 10% again, decreasing their monetary risk to £9.

However, as we discussed in the last lesson, once the trader starts to lose money – it makes it harder for the trader to break even – to make back the money that they have lost.

So, on a losing streak, the account equity decreases, the amount you would risk decreases, but also the amount you would profit decreases.

Have a look at the table below to compare what would happen on a losing streak when you risk 2% per trade against 10% per trade.

maximising profits risk table

As most retail traders trade with an equity less than £10,000, the fixed percentage method can proved flawed. This is because it becomes increasing difficult to make back money after a losing streak, with a decreased profit with a lower risk.

 

 

 

fixed moneyAnother, money management strategy utilised by traders is the ‘fixed money method‘.

This money management method is where the trader places the same amount of monetary risk on every trade. So if the trader opts to risk £100 per trade, they may do so regardless of whether they are on a losing streak. Therefore, if the traders does end up on a losing streak – they do not limit themselves making back this money faster when on a winning streak later on.

If you are confident with your strategy and believe that your trades will win more than 50% of the time – this could be the money management strategy for you.

It is important that if you were to opt for this strategy, to choose a suitable amount to risk per trade, as if you were to incur a losing streak, you will avoid blowing your account, whereas you can recover this money back on a winning streak.

It is important to set goals as a trader, and to include at what stages you would want to increase or decrease your monetary risk, as so to increase profits when your account has risen to a suitable equity. With this trading method, you can break even after any losing streaks as quickly as possible, whilst taking advantage of the winning streaks that you incur.

LESSON SUMMARY:

– A popular strategy utilised by retail Forex traders is the ‘fixed percentage method’. This is a money management strategy of risking the same percentage of your equity on every trade that you make.

– Another, money management strategy utilised by traders is the ‘fixed money method’. This money management method is where the trader places the same amount of monetary risk on every trade.

– It is important to set goals as a trader, and to include at what stages you would want to increase or decrease your monetary risk, as so to increase profits when your account has risen to a suitable equity.

Lesson tags: free forex course
Back to: Free Forex Course > Step 9 - Trading Psychology
0 Comments

Leave a reply

Log in with your credentials

or    

Forgot your details?

Create Account