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Money Managemnet for Beginners

Discussion in 'Beginners Bootcamp' started by Forexwatchman, Feb 11, 2010.

  1. Forexwatchman

    Forexwatchman Sergeant

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    Disclaimer

    When considering whether or not to become a forex trader you must first be able to resist the biggest temptation that exists when it comes to this profession: Greed. It’s the central focus of all the forex advertisements you’ll encounter, whether they are brokers, expert advisers, signal services, or mentoring services. The idea that you have just stumbled upon this new frontier of unbeatable risk to reward ratios and endless, easy income is a myth! So let me end it right here and now for you. YOU WILL NOT BECOME INSTANTLY RICH THROUGH FOREX. Actually, you will become overwhelmed, then frustrated, then tired, then discouraged, then apathetic, perhaps you’ll become hopeful, optimistic, and if you're are lucky, eventually profitable over the long haul. But you won’t be rich overnight. You won’t make a million dollars in one, two or even three years, regardless of how much you have to invest. That is the reality of what you are entering into here. No one increases their account by 100% or even 50% annually, and if they claim to do so they are liars.

    Let’s Begin

    Now if you are still reading this beyond that entire unsympathetic, unapologetic, and downright sobering first paragraph, then perhaps you might just be able to commit to the discipline that real money management takes. Money management is the single most important aspect to a full time forex trader. By mastering money management, you will have the best possible chance at becoming the wealthy full-time retail forex trader that you always dreamed of being. Even with a fantastic strategy based on fundamental and technical analysis that is able to succeed 75% of the time, your profits will be gone in the long run, after one of those 25% draw down periods, if you don’t control your losses and hold onto your wins.

    Now let me explain that I’ve read a lot of money management lessons in the past, and everyone of them bored me with terminology and long-winded examples that only made me feel lost and uninspired to follow through with, so I will not present one of those lessons. I’m not going to introduce you to every aspect of forex money management in order to overwhelm you with my knowledge and feel like I’ve written the Bible of money management here, because as a new trader, that’s not what you need right now. By simply using a demo account you will find out about such important, yet unbelievably uninteresting factors such as leverage, slippage, required margin and free margin, etc; everything that goes along with actual trading with your broker and their platform. You’ll learn faster through 10 minutes on a demo account than lengthy paragraphs and examples that I could provide you with here.

    So You Want To Trade For A Living

    Forex has got to be treated like your own business venture, not your fun pastime. It’s not a casino, a place to gamble away your capital as if you’re just here to catch that big win and then go away to a private island in the sun never to work again. Remember that’s not possible here. You wouldn’t carelessly invest business funds in side bets with an online casino, so don’t treat your MT4 platform as such either. Instead, prepare for possible dry spells where profits are slim or nonexistent. Just as if you owned your own business, you would be prepared for the challenges ahead and plan out your finances accordingly because you don’t want it to fail. You would never take your hard earned revenue and throw it away on a hunch or a gamble. You would constantly assess and adapt accordingly and become more strict and disciplined with the next week’s battle plans. So treat your forex profits the same. They are your lifeblood; they are what keep you in this, so whenever you go to place a trade, make sure that it is based off of sound and informed judgment. Whether you use the strategies that I teach here, or an adaptation of your own, always make sure you know why you are placing a trade and can back it up with fundamental and technical analysis. If you’re not sure what’s happing in the markets, then stay out. Not taking a position is still taking a position after all, it can still have a major effect on your account balance. And if you turn out to be wrong, then you can go back over what you used as part of your decision making process and adjust and adapt it for next time. Keeping a trading journal helps with this as well. This constant evaluation and adaptation is what molds you into a successful trader. You can’t reevaluate a hunch, but you can a strategy. Bottom line: know the why, when, and how much of each trading decision you ever make, or don’t make one at all.

    Cut Your Losses Short, Let Your Profits Run

    The real ‘meat and potatoes’ of money management boils down to one simple saying: Cut your losses short, and let your profits run. Let’s break down what that really means. Whenever you place a trade and see it become profitable, you should lock in that profit while still allowing it to mature and bring you more pips in the process. This is best done through the use of a trailing S/L. Always set your S/L, and always base that S/L off of at LEAST two forms of support/resistance whenever you enter a trade. Whether it’s an actual support/resistance line, a fib line, a trendline, a moving average, etc., base your S/L off of two solid forms of support/resistance plus your spread. Don’t forget the spread!

    Now you might also think I’m going to say set a T/P, but that depends. If you are able to monitor your trades like any full-time forex trader, then a solid T/P is not always necessary, since you can trail your S/L once you get in profits. Now before I explain what that means, let me say that if you can’t monitor your trades at least hour by hour, then set a T/P based off of a pivot point, support/resistance line, fib level, or whatever indicators you use to determine price action levels of interest. Otherwise you will see profits become losses more often than you’d like.

    Now in order to trail a S/L you must first determine what type of market conditions you are dealing with. If you are in a trending market, meaning price action is breaking into new lows or new highs, then you want to focus on how much momentum the trend has in order to determine which timeframe to use for trailing your S/L. The way I determine the amount of momentum a trend has is through the use of my unique alligator indicator (not to be confused with the Bill Williams one). The farther apart the red and blue MA’s are, the more momentum the trend has. In the case of a strong momentum trend, I would use the 1 hour chart, setting my S/L above/below the most recent candlestick wick plus the spread. This way you lock in profits in case the currency pair retraces quite a bit, in which case you can reenter a trade in the direction of the main trend after the retracement ends.

    If you are in a ranging market, the trailing S/L is more complicated. I use the same red and blue MA’s of my alligator indicator, except apply them to my 15 minute chart. Here it takes experience to accurately gauge where support/resistance levels are, but the basic idea is the same as the above one. You want to set your S/L above or below the candlestick wick that you feel is the most recent support/resistance level for price action; the point at which if price action breaks through it you want to cash out and reassess your next reentry. I often use the red MA as my level of resistance, so therefore if I see price action break it on the 15 minute chart, then I’ll close the trade and take my profits. In ranging markets it’s difficult to gauge how far price action will go before it reverses, but usually anymore than 50 pips is doing really well.

    Final Words

    Now I feel like going on, but I also want to wrap things up. So let me add a few more words of wisdom. Never risk more than 2 to 3 % of your capital on any one trade, and no more than 5% or your total capital on all open positions. Those are the numbers I go by, although others will tell you to use even less.

    Overall, money management is nothing new. It’s not complicated, you don’t have to really study up on it, just learn the basics for what is required to execute and close out a trade and what effect that has on your account balance in the long run through a demo account. Although a great strategy is essential too, it’s useless without money management. You can always stop by my website Forex-Nation to learn more strategies. Good luck out there!
     
  2. Cyclon

    Cyclon Company Representative

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    Should be moved

    Did you read the header for this sub-forum?

    Beginners Bootcamp Just getting your feet wet with FOREX? Post and get answers to your newbie questions here.

    This post belongs in General Forex Talk or perhaps Forex Articles.

    ( Or wherever the moderators think best including right here but IMO it is
    misplaced. )

    Cheers,
    Cyclon
     
  3. Forexwatchman

    Forexwatchman Sergeant

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    I respect a man that demands order be maintained. I just posted it here based off of my own perceived meaning of Beginners Bootcamp, but perhaps it's out of place.
     
  4. Eric Alyea

    Eric Alyea Master Sergeant

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    self correct

    First of all it is nice when a “Real” senior person post’s something.
    Cyclon is one:
    under membership list “C” page 71, #3 on “Sergeant” list
    Join Date: 10-03-2007
    Posts: 303 (0.35/day)
    The bad part is:
    “How did you piss him off to get him to come out of the woodwork”
    Self correct your post.
    I had to correct http://www.forexpeacearmy.com/forex-forum/mess-hall/8622-mrs-trader-wife.html myself and it was properly moved.
    This is just a "time in grade thing" nothing personal to knowledge
     
    #4 Eric Alyea, Feb 17, 2010
    Last edited: Feb 17, 2010
  5. RahmanSL

    RahmanSL Major

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    Ok, Newbie here!

    I happen to think Forexwatchan posted correctly under “Beginers Boot Camp” section as information is most helpful to people, like myself, who are just wandering out into the forex world.

    Forexwatchmen, do you mean we shouldn’t trade more than one currencies pair at a time and risk 2-3% of our available margin?
    I have been practicing on Demos (2 platforms from 2 brokers) for more than 4 months, and I open up at least 5 currencies pairs in each trading sessions. Most times I close out 1 or more positions as soon as they hit more than usd20 profit marks. At other times, during wide market swings, I’ll close out profit positions even with usd2 profits. It’s not exactly scalping, but I just want to have profits for every positions. At times, I do find myself hold losing positions going into a usd300 in which case I hold onto that and wait for market reversal whereby I close these losing positions at usd50-80. For these losing positions, I often times roll them to the next day and, sometimes, am presently surprised to see a few hundred dollars profits the next day in which case I closed them pronto.
    Presently, over a 3 days trading period, in 1 Demo I increased the USD1,200+ account to USD1,430+. In the other Demo acc, from USD2,300+ I increased that to USD4,300+.

    I am “trying” to treat these 2 Demo accounts as if they are Live account. At the end of the month, I will analyst my trading style and decide whether I am ready to go live.
    As for that trailing SL, that’s good idea which I shall adopt and familiarize myself with in my trading style.

    The biggest fear & worry, as a Newbie, is going live with an unreliable broker which might turn out to be a scam company. I have just about read up on every reviews available on the 2 brokers which I am thinking of going live with, and I even joined in the forum of one of them. But it seems like there are (and will) always good & bad reviews for every broker, and that makes decision that much harder for me.

    Guess there is only one way to find out whether the broker is any good, and that would be the acid test; right?

    Thanks for the additional info which I find informative, simple to follow, and which makes sense.
     
  6. Ricex

    Ricex Sergeant

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    This is not possible, and thinking like this will empty your account into your brokers pocket quicker than you can say "I want my money back".

    If you cannot accept loss then you will not close a losing trade. The losing trade could keep on losing like a leaky bucket, draining your capital down and down, making your broker the happiest man alive, until you have given him every last dime.

    Rethink your money management before you go live, for every trade you take you must have a plan of action worked out in advance.
     
  7. RahmanSL

    RahmanSL Major

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    Ricex…you are right!

    I closed out 117 positions (10/11/12/16 & 17-Feb-2010), all with profits except 1 position with usd54 loss. Total closed positions: usd2,937.85.
    I carried out 8 trades on 10/Feb, 39 trades on 11/Feb, 6 trades on 12/Feb, 46 trades on 16/Feb, and 18 trades on 17Feb.
    However, I still have 8 open positions with total usd1,426.46 losses which I plan to close out if the total losses hits usd1,500.

    Yup, I still have some ways to go in sound money management before I can even think of going live.
    I know I am “playing” forex trading like I do at the casino….which is highly risky and foolhardy.

    Thanks and much appreciate for the advises; yah!
     
  8. Forexwatchman

    Forexwatchman Sergeant

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    To answer your questions RahmanSL, I do not mean that you shouldn't open more than one position or trade more than one currency pair at all. What I meant by the paragraph under the Final Words section was that you should never risk a total of 5% of whatever your total capital is on all your open positions combined. The main idea there is to remember to take into consideration before you place another trade the risk exposure that your open positions already expose you too, at least until you start to lock in profits on them. Along those same lines, as a new trader I highly recommend not trading more than 2 currency pairs at once, and preferably ones that are highly correlated (there's lots of them to choose from) in order to learn the most about your trading strategy as well as your preferred currency pairs. You'll be able to narrow down the specifics of your trading strategy and analysis of the markets and the forces effecting them by having all your effort and energy focused on what's going on in just one or two areas of the market rather than spreading your analysis over a vast number of different currency pairs. There's already an overwhelming amount of info to digest regarding technical and fundamental analysis to add having to apply it all to multiple currency pairs each day and arrive at a decision. Trust me, even the pro's focus on one or two currency pairs more than all the rest. This will also address your risk exposure since you won't have more than one or two trades open at one time.

    As far as Eric and Cyclon's concerns go, I'm unaware of how to relocate this post. I posted it here assuming more newbies would read it under this forum than the other ones, but didn't mean to upset the cart in the process. I'll keep it from happening in the future though.
     
  9. Eric Alyea

    Eric Alyea Master Sergeant

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    Don't worry about it

    As long as it got a good discussion like that the heckling was worth it. Let it lay.
    (and Watchman, I always like what you write no mater where it is)
    ;)
     
  10. RahmanSL

    RahmanSL Major

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    Forexwatchman,

    Yes, without a doubt, I agree with you 100% to concentrate & to devote my attention on 2 currencies pair instead of buy/sell all over the market whenever I see a spike up or down. I find that much more easier (in fact bordering on being boring) to monitor just 2 currencies pair. But I hardly ever loss money on a trade this way as I watch the market movement carefully before executing a trade.
    At times, I even find myself scalping on the up & down spikes on a pair of currencies for an hour or so and raking in over usd100 per session with 0.2 lots. Then when that pair of currencies goes flat, I stopped and look for another pair of currencies to play with.

    Whatever I did right, I realized that market movements are very unpredictable and it can turn at a moment’s notice to wipe out all my hard earned profits.

    Case in point:
    On my Yesterday’s trading records, that usd1,426.46 has ballooned to over usd3,980 losses overnight, and wiping out all my last few days profits and some of my money too.
    This taught me that if that is a Live account, I should always set SL and refrain from rolling open positions to the following day.

    Thanks for your kind advices and cheers!
     

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