Many investors think that defining their risk to 2-3% per trade and calculate the distance for the stop loss and the pip value in every trade is money management. This is an important part of a money management strategy, but there is a lot more in it…
So, how can we manage money correctly?
1) Fixed $ Amount in draw downs
This money management strategy is helpful for recouping quickly from losses, the trader will trade a % of the account when successful but will trade a fixed amount when an unsuccessful trade hits:
10.000$ 2% risk = 200$ RR= 2:1 GAIN= 400$
10.400$ 2% risk = 208$ RR= 2:1 GAIN= 416$
10.816$ 2% risk = 216$ RR= 2:1 LOSS= 216$
10.600$ FIXED A= 216$ RR= 2:1 LOSS= 216$
10.384$ FIXED A= 216$ RR= 2:1 GAIN= 432$
10.816$ 2% risk = 216$ RR= 2:1 GAIN= 432$
11.248$ 2% risk = 224$ and so on…
It takes you only one trade to recoup completely from two losses.
Compounding is a very powerful long term money management strategy. Basically reinvesting the gains of each successful trade and avoid making withdrawals for a relatively long period of time will boost your account like you never imagined!
3) Segregated capitals
This concept allows a more aggressive trading approach.
The trader split his total trading capital in two, one for risk and one for safe.
The risk account is the 5% of the total trading capital, the rest 95% is in a separated safe account. The trader will only trade with the risk account (5% of total trading capital), but will risk 15-20% of the risk account. Each time he doubles the account he recalculates the 5% of the total invested capital and re-split the money equitably in the two accounts.
Implementing one of those Forex money management strategies or mix a few of them will allow you to maximize profits and minimize losses the best way possible.
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