Money management rules and risk management are two important things that are highly needed in Forex trading. These are the basis of a good trading strategy. Risk management is used to pinpoint the sufficient risk-reward ratio in every trade you make. Meanwhile, money management is the one to be used to calculate the most appropriate position size.
This article will focus on minimizing the risks of FX Trading. Both the right position sizing and money management helps in protecting the trading capital. It also safeguards you from the uncertainties of the future.
It might not look so obvious at first glance but the good calculation of your position size works like magic with trading statistics. This is obviously true since the result of money management is so much better compared to the statistics of those traders who may or may not use the same trading methods.
Fixed Position Size
This is a trading method in which the same position size is used in all transactions. With this method, a trader opening a trading position doesn’t pinpoint the risk involved or the capital percentage itself. The said values can be chaotic from one position to another.
This method is known to be the worst way in determining the position size as the trader cannot properly predict the capital money at risk. This is a very common practice among beginners. The money management here is not possible because, in the first place, there’s no management of the capital.
Money Management and Risk Management Protects The Trading Capital
The primary reason why traders should use these rules is to protect their capital over the uncertainties that the future holds. It is also used to minimize the drawdowns if unprofitable trade comes along.
For instance, three traders got 10 losing trades and 10 profitable trades. These three traders strictly follow the required risk management rules with a risk-reward ratio of 1:2 in every trade.
Trader A was able to risk $20 in each trade and $200 for the 10 losing trades that he had. But because he utilized the risk management rules, the next 10 trades were successful and his capital was increased by $1,200.
Trader B was able to lose half of his trading account after acquiring 10 losses. He used the risk management rules and was able to pull out a 50% profit relative to the starting amount. Another 200% profit was gained during the maximum drawdowns of the trading accounts.
But Trader C has a different approach. He lost 10 of his trades consecutively because of his aggressiveness and just left the experiment. He lost money and to trade again, he needs to fund additional money into his trading account.
Using a fixed risk in every trade you make can blow up your entire trading account. Remember that when your trading account gets into the pit of unfortunate trades and you are utilizing a fixed risk per trade, then it will completely destroy your account. In totality, losing money in the Forex market is actually a matter of choice.