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Survival is the first task, after which comes making the money. One should clearly understand that good traders are, first of all, skillful survivors. Those who also have deep pockets can additionally sustain larger losses and continue trading under unfavorable conditions, because they are financially able to. For an ordinary trader, the skills of surviving become a vital "must know" requirement to keep own Forex trading accounts "alive" and be able to make profits on top. Let's take a look at the example that shows a difference between risking a small percentage of capital and risking a larger one.
So we will go through those rules now. If you get these five money management rules right, your odds of forex trading success will improve greatly. These rules can be tailored to your own trading system but some version of these five forex money management rules should be written down and read before every single trade is placed.
The idea is that a trader should risk only a small percentage of their account on any one trade. Some traders will vary the size of each trade, depending on recent trading performance. For example, the anti-martingale money management method halves the size of the trade each time their is a trading loss and doubles it every time their is a gain.
A top trading strategy and sound risk management plan should help a trader make money over time, but you can never be sure what will happen in the next trade or even the next 10 trades. To mitigate the risk of the next trade being a loss, the forex trader should keep the trade size relatively small compared to the size of the trading account.
Then taking this same principal and extending it, the trader should also protect themselves against several losing trades in a row by making the amount risked so small that even ten losing trades in a row will be something they can quickly recover from. What is a drawdown in forex? A drawdown is the difference in account value from the highest the account has been over a certain period and the account value after some losing trades.
The larger the drawdown, the harder it is to recover the account balance with winning trades. Traders will set a max drawdown level that is acceptable according to their trading strategy backtesting. Is risk reward the best? The rule of thumb taught in trading textbooks is that a trader should aim to have winning trades that are on average twice as big as the losing trades. With this risk: reward ratio, the trader need win only a third of their trades to breakeven.
In actual fact, the most important thing is to be consistent in the risk: reward ratios chosen. If a trader chose a risk: reward ratio of , then the trader must win a higher number of trades at least 6 out 10 trades to be profitable. If the trader chooses a risk: reward ratio of , then they need to win fewer trades 1 in every 4 trades to break even.
How to be a consistent forex trader … To achieve long-term profitable forex trading, a trader must have some idea what to expect from his or her trading strategy. Two important and complimentary components of that are the win: loss ratio and risk: reward ratio. Using a stop losses locks in the maximum amount a trader can lose in any one trade, while using a take profit order locks in the maximum amount the trader can win.
Of course there are some disadvantages to using stop losses, the most frustrating of which is seeing a stop loss triggered, only for the trade turn around and hit the take profit level. But as annoying as that experience might be, it is worth keeping a stop loss to avoid those occasions when the price does not turn around quickly and leaves the account with an unmanageable loss.
Last but not least; successful trading is only possible when the trader can make unemotional decisions about what do with a trading opportunity. If you have more money to trade, it provides you with more room to manoeuvre in your trades and adds flexibility to your money management rules that increase the odds of being a profitable trader.
CFDs are complex instruments and are not suitable for everyone as they can rapidly trigger losses that exceed your deposits. You should consider whether you understand how CFDs work. Please see our Risk Disclosure Notice so you can fully understand the risks involved and whether you can afford to take the risk.
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