The basis of any successful Forex trading strategy is sound money management and here we will discuss some elements of pros use, to protect equity and build a platform for huge gains. If you look at any successful football team they are built on strong defense, the team knows if they don't let the opposition score, their offence will get the opportunities to win the game and it's the same in Forex.
All trading systems have losses and when trading on leverage, you cannot afford to lose too much money. Lose 50% of your equity and you have to make 100% to just break even. This may sound common sense but most traders over leverage which leads me to the first key point you need to learn.
Use Sensible Leverage
Your broker will give you 200: 1 Leverage but this to much for most trading accounts. You should use 10 – 20: 1 leverage as a maximum amount, otherwise volatility will destroy your account.
Place Stops Outside of Random Volatility
This is a concept that most traders never understand and it's simple:
A trend will go up or down but there will be short sharp corrections in the opposite direction, you must make sure your stop is placed outside these corrections or you will get stopped out by random volatility. If you want to win, you have to take a calculated risk, most traders try and restrict risk so much they create an inevitable wipe out.
Also when trailing a stop make sure again it's outside of random volatility, so you can stay with the trade for longer. In Forex trading you are going to lose a lot of the time and you therefore need to run your winners to cover you inevitable losers. Many traders think a profit is a profit but its not, you need your winning trades to be far bigger than your losers, otherwise you will suffer an equity wipe out.
Do Not Diversify
Many traders think to win they need to diversify, that's OK on a $ 100,000 account but on a small account, all this does is dilute profit potential. Focus on one trade at a time on a small account and only hit high odds trades.
No Trade is Better than any Other
Some traders see some trades as better than others and take more risk on them but all trades in terms of money management are the same, you assume the worst first and things can only get better. Another key error made by traders is to work out the risk reward as, their target minus their stop this is a huge mistake, as it's only an opinion and nothing more.
Defend What You Have at All Costs
Some of the best traders are good at poker and the game of poker, can teach you a lot about Forex money management. The successful poker player takes his losses cheerfully and knows he has to preserve his chips at all costs, he also has patience and only plays the hands, he is certain he can win and when he does have a winning hand, he is not afraid to take a calculated risk and hit it hard.
If you have read the above money management tips you will see why the good poker player makes such a good trader and if you learn the tips above, you can protect what you have and when the winning trades come, you will be able to pile up some big Forex profits.