One of the crucial components of trading forex signal is the proper money management system. It is a major and very important element of forex trading. Profits cannot be achieved and sustained without one. Basic purpose of money management system is to protect trading account from excessive losses and to preserve profits. The proper money management is absolutely necessary and any trading activity will have no future without one.
This aspect of speculative forex signal trading is tightly connected with trader’s psychological approach to trading. Any devotions from it would be an indicator of typical human’s emotions as greed or lack of discipline which are the main reasons for failure in this field. Not having money management system in place would effect in damaging the trading account to such a point that it would be impossible to bring it back to good shape again or totally destroying it.
As we know the trading forex signal can be very unpredictable task especially in current difficult market conditions. It is down to proper techniques and discipline to show profits on the end of the day. Money Management system can be sometimes the only thing to save forex signal trader from disaster.
It is very difficult to choose the system which would suit particular trader or trading style. There is a huge amount literature devoted to money management systems and some of those opinions would contradict each other. It can be very confusing especially for inexperienced traders.
Proper money management system would vary one from the other and would depend of many different points as; trading style, time frame used, duration of trades, amount of trades at the time, account size, past performance, trader personality or even trader’s lifestyle.There is no solid scheme to construct one good money management system and every forex signal trader has to develop it himself and adjust it to his own trading practices.
The important point is that professional forex signal trader would have a money management system constructed even before his trading system. The way the trades are placed, amount of them, risk taken etc.
There are few essential points of every good money management system.
- Allow significant amount of time for the trading system to prove its profitability long term and test it in different market conditions. Choose time frames; calculate stop losses and amount of trades placed at the time. This would give the solid base and confidence for future management system.
- From your past performance calculate possible consecutive losses which may occur and be ready for it. It will happen! Based on this study decide on how much of account equity will be risked per trade placed. It is a rule to risk 3% of the account in singe trade.
- Allow sufficient capital reserve in case of single loss or series of consecutive losses.
- Do not calculate stop losses based on a fixed percentage or the sum from the account equity. Here technical trading levels in accordance with particular forex signal system should be used.
- Avoid averaging. It is a technique very popular among novice forex signal traders where new position is added to an existing one that has floating loss. It is short lived and dangerous practice in forex signal trading. Accept your loss and move on. There are more opportunities around the corner.
-Try to keep risk/reward ratio above 1
-Do not be greedy. There is no way in forex signal trading to get rich quick.
Apply above rules and stick to them. Remember that forex signal trading is not a gamble but mathematically structured business.
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