In this article, I will share five essential secrets for successful trading that revolve around the crucial topic of money management. While some traders may find it tedious, embarrassing, or even emotionally uncomfortable to discuss risk and capital management, it is essential to address these topics to improve your Forex trading.
Ignoring the money management can lead to significant problems that may become too big to manage. Therefore, it’s crucial to be honest with yourself and prioritize tackling the hardest or most tedious tasks first and as often as necessary.
By implementing the following tips, you can gain a better understanding of managing your risk and capital while trading the markets.
Keep risk consistent
One key aspect of successful trading is maintaining consistent risk levels. Resist the urge to increase your position size until you have doubled or tripled your capital. Many traders make the mistake of upping their bets immediately after a profitable trade, which can quickly lead to a wipeout.
It’s common for traders to become overconfident after a series of winning trades, but this tendency should be avoided. Instead of following the crowd, it’s often better to do the opposite when it comes to money management. Despite the natural inclination to become less risk-averse after a successful trade, it’s important to recognize that there’s no logical reason to believe the next trade will be a winner.
While it may be tempting to indulge in the feelings of euphoria and confidence that come with a successful trade, doing so can be detrimental to effective money management and trading success. If you want to make a living in the markets, it’s crucial to ignore these emotions and maintain consistent risk levels.
Withdraw profits
Maintaining consistent risk levels is crucial for effective Forex money management, as discussed earlier. Professional traders do not increase their risk exponentially after a winning trade since it’s not a realistic or logical way to manage risk. Instead, they typically withdraw profits from their accounts each month and keep their accounts funded at a similar level each month.
By withdrawing profits regularly, you can avoid increasing your risk amount over time. It’s essential to build up your account to a comfortable level and then withdraw profits monthly to support your living expenses. Doing so can help you reach an equilibrium level where the amount you risk on each trade remains stable.
Moving a stop loss to ‘breakeven’ can kill your account
Moving a stop loss to the “breakeven” point can be detrimental to your trading account. The key point to remember is that you should not move your stop loss to breakeven unless there is a sound price-action based logical reason to do so. Arbitrarily moving to breakeven or following a pre-decided rule is not a reliable way to manage your trades. In fact, constantly meddling with your stop loss or prematurely closing trades could reduce the effectiveness of your trading edge.
Giving your trades enough room to move is crucial, and you should only consider moving your stop loss to breakeven if there is a logical basis to do so. Otherwise, you may be making decisions based on fear rather than sound analysis. It is important to overcome your fear of losing money and learn to let your trades move without constant interference to make a profit.
However, there are times when moving to breakeven is appropriate. For example, you may want to move to breakeven if an opposing signal causes caution and changes market conditions, if the market approaches a key chart level and then shows signs of reversing, if there is no movement in the trade after a few days, or if a big news announcement is forthcoming. Volatile news releases like Non-Farm Payrolls can often alter market conditions, so it may be wise to move to breakeven or monitor the trade in such instances.
Don’t be greedy: don’t aim for big targets all the time
Avoid being greedy and don’t always aim for big targets. Taking profits is an essential part of effective money management. However, many traders struggle to do so, often leaving profitable trades open for too long. The reason for this is simple; it can be difficult to close a trade when it is going well because of the natural desire to hold on for even more profits. While it is crucial to “let your winners run,” it is equally important to know when to do so. Not every winning trade will result in a significant directional move, and the market tends to fluctuate more often than not. As a result, it makes more sense to take a solid 2 to 1 or 3 to 1 profit as a short-term swing trader when the market offers it, rather than waiting for a potential retracement that could lead to an emotional exit due to missed profit opportunities.
Understanding when to let profits run
Occasionally, the market presents a rare opportunity for a “home-run” trade. However, the key is to avoid the mistake of constantly aiming for a “home-run” on every trade. Typically, the market moves within a certain range each week or month, such as the average weekly range of the EURUSD being around 250 pips. Knowing when to let the trade run and when to take certain 1 to 1, 2 to 1 or 3 to 1 reward requires discretionary price action trading skill.
To help determine whether a trade is a good candidate to try and run into a bigger winner, here are some simple filters to use:
Strong breakout patterns – When the market has consolidated for a while, it often leads to a strong breakout up or down. These breakouts can be good candidates for “home-run” trades. However, not every breakout is equal; some are weaker than others and sometimes the market makes a false break before the real breakout occurs.
Obvious trend continuation signals – Strong trending markets can also be good candidates to let your trade run into a big winner.
Price action signal at a key level in a strong trending market – Another good scenario to look for potential “home-run” trades is after the market retraces to a key level within a trending market.
Closing Thoughts
Although having a sound trading strategy is crucial, it should not be the sole focus of your trading plan. Properly managing your risk and overall capital is the real key to successful trading. Many of you are probably aware that you aren’t dedicating enough attention to capital preservation and risk management, perhaps because it’s not as exciting as other aspects of trading. It’s time to acknowledge the truth and take it seriously. Neglecting risk management and capital preservation can lead to financial distress and personal strain.