Forexwatchman
Sergeant
- Messages
- 198
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!
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!