Money management tasks, Trade management,Risk Control (Stop loss) management.
Money Management Tasks.
1) Determine how much you are willing to risk on each trade?
2) Understand the risk of the trade you are about to take and size the trade appropriately.
3)Track the trade going forward.
4) Pay attention to your risk points.Take small lossers before they become big lossess.
5) Review your performance.
Success in this game of currency trading is often more dependent on the use of brakes than the accelerator pedal.Less than 2% of the equity is good stop loss point.It is important to watch your positions as they progress and adjust your stop prices as the market moves in your direction.Stops should be a one-way valve for the flow of money from the market to your account.
Trading and money management professions are expensive to learn and not every one who attempts to learn succeeds.Those who do succeed may profit handsomely.In this respect the trading profession is no different from the medical, engineering, technical, artistic, sporting and political professions.
Trade Management.(Two approaches).
1) SCALING OUT APPROACH. Putting on the entire position upon the initial entry and then liquidating positions, of that positions a) to cover costs b) to take a small profit c) and finally to ride the trade as far as it will go with what remain of the position after partial liquidation.
2) PYRAMIDING APPROACH. Build the position by entering a position of it to test the waters.If the initial position becomes profitable, you then add to the positions in stages until you have put on the entire position.
Much of any acceptability depends upon your personal comfort level in handling risk and your financial capacity for handling risk.
Money Management Strategy.
Objective - Preserving your equity balance from high risk exposure.
Core equity - ( Starting Balance- Amount in open positions)
Stop Loss - 1% to max 3% of your core equity, depends upon the confidence of your trading system.
STOPS are 1) Profit management tool 2) Risk control tool
Initial Risk Control - First Protective stop Market goes your way - Your stop now becomes the Profit Management tool. You have a reasonable lead on the market.You are holding a risk free trade.Continue to let the profits run until your objective is used.If something changes you simply exit the trade with what you have in it at that point.Your profit potential improves when you allow the market to behave as it needs to on the way to your objective.
Negative Characteristics of stops.The number of profitable trades is sometimes reduced since these stops may allow modestly profitable trades to turn into lossers.Also occational large retracements in open trade profits can make the use of these stops quite difficult psychologically.No trader enjoys seeing large profits reduced to small profits or watching profitable trades become unprofitable.
Movement of Stop in the direction of the trend using the recent highest high or lowest low prices(Uptrend -lowest low of last few candles, Down trend- highest high of last few candles.).This depends on the room we wish to give the trade.A portion of your trade can be closed using extreme profit rule.
Trailing stop strategy.Two important goals in trade management 1) They should allow profits to run 2) They should protect open trade profits.They are best suited with trend following type systems.In counter trend trading move, aggressive exits are more suitable.Use different exit strategies based on underlying market conditions.
LOSS RULE. Winners versus loosers. PRBLEM. Consistent and net loosing result that occurs over time.(No adding to a particular loosing trade.)
CAUSE.The inability to cut your loosers.Most significant or consistent loosers are a result of some form of attachment to results on behalf of the trade.(Holding or adding to a looser). 1) Not placing stop loss order 2)Holding losing trades past a reasonable time 3) Over trading ( All the above are symptoms of an emotional attachment).Holding or adding to alooser will say louder that you have this problem.When you add to a loosing position 1) Cash loss is ignored 2)Market risk exposure is willingly increased. You are not acting in the best interest of your account.The trader is actively participating in his own demise.EMOTON. 1) Need to be right 2)'Hope' market will come back. RULE .NEVER ADD TO A LOOSER. Don't throw good money after bad. 1) Accept a reasonable planned loss 2) Learn the lesson the loss has taught you.Market only moves because of the net order flow imbalance.
TIME STOP (Limit loss).Daily Time Frame.One day must pass in order to determine if your executed trade has the potential as you see it.GIVE TWO DAYS TIME to work the trade in favour of you and if it does not work close the position with minimum loss.Incorporate this rule into your trading system.
The tendency to take greater risk with money made from trades than money invested as capital makes no sense.Strip your winnings from your account and put them in a safe conservative place.
1) Keep tight stop lossess.
2) Don't leverage your account more than required. Maximum 2% of your equity.
3) Enter only one currency at a time.
4) When you have reached your weekly or monthly target, stop trading for that week and for that month.
300 to 400 Pips per month is a good target.
60 t0 100 Pips per week is a good target.
5) Define Risk and Reward.
EXITS 1) Stop loss exit 2) Trailing stop exit 3) Profit Target exit
MINIMISE YOUR LOSSESS.
Minimise your lossess so that you can stick around to profit in the future. The successful trader is the one who can survive.No one can be right all the time, but as long as you know how to recognise bad trades, so that you can exit them quickly and likewise recognise good trades so that you can ride them for as long as they are profitable.Most successful traders are constantly studying their craft, looking for an addtional edge that may help them make more informed decisions.
Individual trade - 2% limit loss
Monthly loss limit - 6% of your equity
Take the last days of the month to regroup, analyse the problems, observe the markets and prepare for re-entry when you are confident that you can prevent a similar occurance in the following months.Employing a monthly stop loss limit allows the trader to hold, three open positions with potential for 2% lossess each Or six open positions with a potential of 1% loss each and so forth.
Initial Stop loss order and trailing stop loss order
Both 2% and the 6% rule allows you to pyramid or add to your winning positions, when you are on a roll.If your positions run into a positive territory, you can move your stop above break-even and buy more of the same currency pair, as long as the new aggregate positon is no more than 2% of your account equity and your total account risk is less than six percent.Adding a system of pyramiding into the equations allows you to extend profitable positions with absolutely no commensurate increase in your risk thresholds.Pyramiding a good tool to increase profits and should be used with discreation.Pyramiding works good in a strong trending market with shallow retracements.It is dangerous in a sideways market.
The point here is to be confident in your strategy and carry through with your plan.Stop loss orders help us stay on trade without clouding our judgement with emotion.Smart money management does not just involve risking the right amount on every trade, it also involves managing a winning trade from start to finish.
Everything must be defined.That is why a complete trading strategy must include specefically how winning trades will be managed until the position is closed.
Trade management Plan.Protecting profits through smart money management is equivalent to conserving the value of the trading account.
Stop loss placement.Trading capital is the life blood of a currency trader, he must protect every ounce of it.Trading is a game of risk versus reward.It is also a game that is not forgiving the players who come in without learning the rules.To make serious money in this envirnment traders must manage their money.
PROPER MONEY MANAGEMENT.
1) Proper money management takes into account both risk and reward factors.
2)Proper money management takes into consideration the value of the entire account.
3)Proper money management discounts all factors that cannot be mathematiclly proven.
4)Proper money management says if 'a' and'b' then'c'.
5) Proper money management never dictates when to get in or where to get out of markets.This is better defined as 'trade' or 'risk' management and should not be confused with proper money management methods.
Money Management Planning should be a conscious part of preparation even before taking the first trade.