Monday, May 18, 2015

Forex Money Management Rules

The money management strategy is very personalized, since it is designed and executed to meet individual requirements of a trader. This strategy varies from one trader to another, because every trader has a different goal, different risk tolerance level, and different amount of capital. Therefore, there is no universal advice to formulate this strategy.

However, following are some tips that can be used by binary options traders to select a reasonable money management strategy that will be useful for them to make profitable trades:

Control the Risk and Achieve Consistency

A trader must be careful in formulating the money management strategy to increase returns. The successful binary options traders with long term plans do not seek to increase their return. Instead, they strive to control the risk, and achieve consistency over a longer period of time. They try to find the techniques that will help them attain consistent outcome with minimal drawdowns, even if it means earning small profits in the process. Therefore, a trader should control his risk, and achieve consistency first, and then accept the returns no matter how small they are.

Try to Achieve Break Even

In the past few years, most traders have adopted a strategy to risk a small portion of their profit. Money management strategy is also known as fixed fractional trading, as it decreases the dollar amount of risk when a trader suffers a loss, and increases the risk level when he earns profits. Therefore, a trader must strive to achieve a breakeven with a proper money management strategy. When traders use this strategy to risk a small portion of their profit, they turn their trading system into a loser. But if their approach involves risking a fixed dollar amount on every trade they place, it will not only improve the system's performance, but will also allow them to hit the break even, and improve profits.

However, this approach has its down side. By adopting it, the recovery of the drawdowns is not as quick as traders expect, and the profits cannot be recovered as fast as they were made by traders.

Periodically Taking out Profits and investing them elsewhere to allow Diversification

In order to get back the profits as quickly as they were made by traders using fixed dollar amount approach, a trader must take some profit out of his account, and invest it elsewhere to allow diversification and reduce the overall risk. Being a trader, you must make it a habit to take a portion of your profit and invest it where it can be best utilized to increase its value.

Although, the account balance may grow at a slower pace with this approach, but it is better to keep on increasing the value of your money than to expose it to risk. This way, a trader will be relieved and stress free by reducing his bet size, in case he faces a series of losses.

Keeping the Focus on Maximizing Returns is not a Wise Approach

Therefore, a successful trading approach with a money management strategy is to keep a certain amount of profit aside, and invest it in something more productive to diversify away the risk. Nowadays, every trader tries to find a formula to maximize the returns, but what they don't realize is that winning big doesn't mean they will not suffer losses. Sometimes, the highly profitable accounts end up losing all of the balance due to lack of understanding.

A trader must always develop a sound trading plan when placing their money in the binary options market, because it is the real money they are trading with. Therefore, they have to adopt reasonable strategies and approaches to trade successfully in the market. Being a trader, if you manage to keep a portion of your profit aside every time you trade, it will improve the overall value of your investment, and boost your confidence.

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