Money Management Rules in Forex Trading
Money management in Forex is one of the most important and yet most ignored topics. Too often we hear and see many trading strategies being advertised all over the place, but very little information out there on money management.
Profitable trading is not all about one or two fluke profit trades. Profitability in Forex is the ability to make Forex trading profits over time, with consistency and regularity. Forex money management is what makes the difference between a winning trader, and one who wakes up in the morning afraid to check his trading platform because he doesn't know what to expect.
It is possible to have six trades in a month, with three winners and three losers, and still come out on top with profits. It is also possible to win 5 out of six trades, and then have the single losing trade wipe you out and return you to baseline level for the month.
What is at play here? The answer is simple: money management. The intention of this article is to put into your hands, ten essential money management rules so that you can transform your trading habits to make you consistently profitable. No matter how juicy a trade may look, limit your risks so you can live to trade another day. Most experts have stipulated 5% as the maximum exposure your account should have in the market at any given time.
It is possible to have six trades in a month, with three winners and three losers, and still come out on top with profits. It is also possible to win 5 out of six trades, and then have the single losing trade wipe you out and return you to baseline level for the month.
What is at play here? The answer is simple: money management. The intention of this article is to put into your hands, ten essential money management rules so that you can transform your trading habits to make you consistently profitable.
No matter how juicy a trade may look, limit your risks so you can live to trade another day. Most experts have stipulated 5% as the maximum exposure your account should have in the market at any given time.
Here they are:
Do Not Over-leverage Your Accounts
The allure of Forex trading is in leverage: the ability to control large positions with a small amount of money. Many industry experts do not advocate using more than 1:100 leverages, but we see traders being offered leverages as high as 1:500 for trading. Leverage in Forex is a two-edged sword. It can work in the trader's favour, or against him. Most of the time leverage works against traders.
Do Not Over-leverage Your Accounts
Over trading can mean taking too many trades at a time, thus increasing your risk exposure to the market. It can also mean trying to chase pips all over the market by placing too many trades in a day, especially after a losing run in an attempt to get back some of what was lost. Either way, you run the risk of losing big.
Use Acceptable Risk
No matter how juicy a trade may look, limit your risks so you can live to trade another day. Most experts have stipulated 5% as the maximum exposure your account should have in the market at any given time.
Trade with Stops and Targets
Not using a stop loss or a profit target is pure suicide! In Forex, an overnight event can send an unprotected trade badly into the negative territory. It happened in early 2008 when the Feds cut interest rates in an unscheduled weekend move, and more recently with the SNB and Bank of Japan's interventions. You would never know what hit you.
Use Trailing Stops
This is a feature that helps a trader to protect and lock-in profits.
Never Take Trades, Which Do Not Deliver Risk-Reward Ratios of at Least 1:2
A risk-reward ratio of 1:2 means your profit target is twice your stop loss. If your trade has a R-R ratio of 1:3, it means that for every winner, you will need to lose an equivalent trade three times to wipe out profits. If you make 600 pips in a trade (with a 200 pip stop loss), you would, then need to lose three trades using the same R-R ratio to cancel the profitable trade. This is why a trader can have two winners and three losers in a month and still make money.
Do Not Trade During Sleep Hours
Trading at hours when you normally sleep disturbs your body rhythm and brain function. You will be more prone to mistakes that affect money management. If you want to know what are the best hours to trade on Forex market, read article:
Best Forex Trading Hours: When to Trade and When Not To Trade
Aim to Compound Small Profits over Time
Trying to score jackpots in trading is what usually gets traders taken to the cleaners. An approach of compounding small profits for bigger gains much later is the way to go.
Use Matching Instruments for Your Account Size
Money Management really is one of the key elements in Forex trading. You can use the best strategy ever developed, have the best trading plan, be perfectly disciplined but when you don't use proper money management rules you won't succeed.
In my early trading years, I blew up multiple accounts to learn how important Forex money management is. So do not repeat my mistakes.
When to Trade Forex and When NOT TO TRADE
It is true that Forex trading is by definition, a market that operates 24 hours a day. This is because there are various key trading zones where market activity in the Forex market is carried out, corresponding to the three major time zone financial districts. These are in London, New York and Asia. It is the activity in these zones, which come up one after the other that give the Forex market its 24-hour appellation.
That said though, we need to point out that even though the Forex market is by definition, a 24-hour market, there are only specific times of the day when the Forex market has enough market activity that traders can profit from. These times are the times when there is overlap of activity between two-time zones. Profits in Forex are only made when there is enough liquidity, volatility and market activity, and these times are the best times to trade. Overlap means more liquidity and more market activity, which produces volatility. In Forex, a trader can only make money when the market is volatile and not when it is nearly still.
Best FX Trading Hours
So the next point would logically be to know at what times we have overlap of two trading time zones. These are the times when there is overlap between the London and New York sessions, the New York and Asian sessions, and the Asian and London sessions.
In studying and memorizing these times, also make some allowance for the Daylight Savings Time (DST) when we have time corrections in March and October to correspond to the equinox changes in the earth's position relative to the sun.
| TIME ZONE |
EASTERN TIME |
GMT |
| Asian Open |
7 PM |
12 MidNight |
| Asian Close |
4 AM |
9 AM |
| London Open |
2 AM |
7 AM |
| London Close |
11 AM |
4 PM |
| New York Open |
8AM |
1 PM |
| New York Close |
4 PM |
9 PM |
It is very clear from this table above, that there is a period of overlap between London and New York from 12pm GMT to 5pm GMT, between London and Asia from 8am to 9am GMT. So if you are a trader looking to profit from the best volatility, you can get, then plan your trading around these times.
Best Forex Trading Days
Knowing the best trading times in a day is one aspect. The other aspect is knowing what days to trade, as there are days when your chances of making money are better. In order to understand the concept of the best trading days, it is important to watch the intra-day volatility of the market from market open at 9pm GMT on Sunday to market close at 9pm GMT on Friday. A study of the market movement of currencies will easily show that Tuesdays to Thursdays are the days with the highest degree of volatility, with volatility being relatively low on Mondays. However, a recent trend has emerged where volatility levels for the week now take off earlier, and that is during the New York session on Monday. Due to not enough volatility, I suggest you to avoid trading during Forex market holidays.
Making this Work for You
One of the most important factors you need to consider when deciding on when to trade and when not to trade is your own body rhythm. In nature, some insects are nocturnal insects; they are most active at night and rest in the day. Human beings are diurnal; we are active during the day and sleep at night. Sleep is very important; without a clear head, the trader becomes extremely error-prone. You need to know how far away in time your area is from the time zones. Those who live in Africa and Western Europe seem to have the best deal of all, as they can easily take the overlaps during waking hours. It is more difficult if you live anywhere else, as you may only be able to trade one overlap session during your waking hours.
So plan your trading times to coincide with when you are at your optimal levels of performance, and trade accordingly. Do not sacrifice sleep for trading.
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