Uncommon Risk Management Success in Forex
Key To Successful Forex Money Management
When you open a Forex brokerage account, or any brokerage account for that matter, your main goals should be consistent profits and low risk. With this in mind, if you open your brokerage account with $1,000, a 3 percent risk factor would be a very reasonable risk for this account. It would not be a good idea to open a Futures Brokerage account, hoping to not risk over $30 of the $1,000 account on the first trade, since the minimum trade size is usually $10 per tick. In this case if there was a 2 tick spread and the market went 1 more tick against you, you would lose your $30.
This problem is solved by trading Forex. There are several Forex brokers who have Mini, Micro and Nano Forex accounts.
Let’s say you opened a micro account and risk 3% on your first trade. You would need to figure out where your stop loss is to be able to determine your actual risk. If you placed your stop loss at 100 pips from your entry, using a 10 cent per pip lot size at 100 pips, you would have risked $10 or 10% of your account.
You could have placed your stop loss at 300 pips using a 30 cent per pip lot size. At 100 pips you would have risked $10 and still would have been at your 3% risk factor. If you placed your stop at 400 you would have risked more than the 3%. For a 400 pip stop, you would need a Nano account for proper risk management.
The first thing you need to consider when opening a brokerage account is the brokers minimum lot size vs. your intended account size. If you plan on opening an account of $1,000 or less, it may be good to find a Nano broker for the Penney Lot size. This way you can be successful by using proper money management.
Forex Money Management vs. Risk On Your Starting Balance
When you open a Forex brokerage account, the beginning balance is your actual risk. With this in mind, proper risk money management is on the opening balance of your account. Lets say you decided to risk $30 on the first six trades. You would be risking $180 or 18% of the Forex account. If you were to lose all 6 trades then your account balance would be at 82% of what you started with. What if there was a better way, that took more than 30 losing trades in a row to lose 18% of your account instead of only six trades?
A Safer Forex Money Management System
One way you can have safer risk management on your Starting Balance in your new Forex brokerage account is to divide risk into two categories. Manage the risk on your starting balance of 3% and then separate your profit & loss into another risk management category. In the two categories; let’s say your management is 3% of your starting balance and 25% of your profit/loss on each trade. If your first trade closed a winner earning you $60, you would still risk $30 on the next trade. The difference now is adding a percent of risk from the second category. You will add 25% of your $60 profit you just made to that $30. This breaks the risk management into two categories; risk on Starting Capitol and Risk on Profit. In this instance you would risk $45 on the next trade.
On the other hand, what if you lost the first trade? If you want to exponentially protect your starting balance, where it would take more than 30 trades before you lost 18% of your account, then you could subtract 25% of your loss from your next trade in the same manner as you would have added to it if the trade would have made $60.
Your next risk size would be $30 – $7.50 = $22.50. If you lose the next trade you would subtract another 25% and so on. This way you can exponentially protect or increase your account, and truly never risk more than 3% of your starting balance on any one trade. That is the key to successful risk management of your Forex Brokerage account.
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