Articlesbase - Effective Money Management in Forex Trading

banner First let's discuss about management. It is an on going process that manages your resources efficiently. For Forex trading, money management is about sizing your trading lots, margin call and risk you can handle with your limited capital.

In order to practice effective money management, you need to know 2 things. First is your capital that is used to trade. Second is the leverage of your account. The trades are mention here default 100k full contract at 1 lot. Mini lots are 0.1 for 10k contract.

Capital: Your Forex Trading fund

Every forex trader will need to have capital as funding to trade forex. Since it is the currency market, your have to fund in money into your trading account and use it as a capital for Forex trading. The default currency is usually United State Dollar. But it you use Great Britain Pound or Europe Euro, the trades will automatically convert to the currency that you buy or sell using the broker exchange rate. Example if you are default using USD in your trading account and you buy EURGBP, your USD will be converted to EUR and use that to buy GBP. (USD * exchange rate of EUR * exchange rate of GBP) to buy 1 lot of EURGBP. This will be the amount that will be used to buy and will show as holding equity in your trading account summary. The margin will be depending on your leverage which is the next section.



Leverage and trading account.

If you have a leverage account of 100:1, buying 1 lot at 100k contract, you will need to have $1k holding capital. This is using USD as a basis. So if you are buying EURGBP, your $1k will multiply by exchange rate of USDEUR and EURGBP. Notice that the exchange rate is usually quoted in EURUSD, so you need to convert is to USDEUR by dividing it over numeration 1. So you may be required to have $1.8k USD to execute this buy 1 lot trade. As you can see, buy currency that is much more higher exchange rate then your default currency you will need more capital. But the profit and loss will also increase due to this. Meaning if your trade win 100 pips from selling of EURGBP, your profit will be $1.8k (higher then $1k profit USD as default). This is a double edge sword. Losses appied. (Am not taking into account swap).


With the above 2 values, you can easily calculate the capital you need. But what is your minimum level or capital that needed to handle losses and drawdown? When we talk about drawdown is referring to the maximum drawdown for unrealized loss that your trading account will not margin call out. Example if your trading is set to stop loss of 100 pips and maximum drawdown is 4 lots, so effectively your capital must be able to take 500 pips of losses before you profit can come back. For a full 100k contract that would be $5k for USD default. As a rule of thumb, taking into account highest exchange rate for USD to other currency, 10% rule applies. This is taking into account that your loss does not go beyond 500pips. If it does, use 0.2 to 0.5 lots trading instead. This will bring down your 10% to 2% or 5% respectively.

This is the portion where many traders did not estimate when running expert advisor. If your combined expert advisor gives 1000 pips maximum drawdown, you have to take into account this -1000 pips into your money management.

source http://www.articlesbase.com/currency-trading-articles/effective-money-management-in-forex-trading-5911364.html


Money management may very well be the most important piece of the trading puzzle. In A Trader's Money Management System, expert Bennett McDowell provides time-tested techniques that can turn a losing trader into a winning one?and take the winning trader to an entirely new level. In revealing his personal approach to staying out of trouble in the financial markets and maximizing profits, he offers comprehensive insights into:
  • The psychology of risk control as well as the finer aspects of setting stop-loss exits
  • The value of managing trade size and consistent record keeping
  • The process of putting together your own personal money management system
Unlike other books that focus on the complex mathematical theories behind money management, this book presents its system in straightforward, easy-to-understand terms that will allow you to quickly see how these concepts work and immediately benefit from the value of effectively managing risk.

From the Inside Flap

Risk control tends to be the last thing that most traders focus on, perhaps because of the popular belief that it's their trading strategy that will generate great fortunes. But ultimately, a strategy alone won't create riches. A trader or investor needs to develop discipline, a strong financial psychology, and a sound money management system to maximize profits and keep them out of financial danger. In A Trader's Money Management System, veteran trader Bennett McDowell offers readers an expert guide to the most important elements of money management in trading.McDowell shares his personal money management system, with the ultimate goal of helping you design your own system, customized to fit your risk tolerance, your experience level, and financial needs. He identifies the six types of risk to consider every time you make a trade—trade risk, market risk, margin risk, liquidity risk, overnight risk, and volatility risk—covering each in detail.
In easy-to-understand terms, the author then breaks down his system into five key elements. He first explains the psychology of risk control, telling what issues to look for and how to address them in order to more effectively implement your money management system. McDowell then details a variety of stop-loss approaches and gives you tips on how to make sure you adhere to them when they're hit. He follows with a discussion of trade size, showing how to determine how large or small your trade size should be so that you are not overextending your risk. McDowell then covers the crucial element of record keeping, and explains how it pays significant dividends. Finally, he shows how to design a realistic personal plan—one that you will continue to use and profit from.
This book also equips readers with two valuable tools: A one-month free trial of Trade Size Calculator software and The Trader's Assistant recordkeeping materials. The trial Trade Size Calculator software is downloadable at www.traderscoach.com (see Appendix A for details), and The Trader's Assistant recordkeeping materials can be photocopied directly from the book. These two tools complement the text and together provide a complete package that will deliver better results to your bottom line.

A Trader's Money Management System: How to Ensure Profit and Avoid the Risk of Ruin (Wiley Trading) 

From the Back Cover

Praise for A Trader's Money Management System"I am pleased to strongly recommend this excellent book, A Trader's Money Management System. If you are picking up this book, congratulations, since you have taken the first steps in following in the footsteps (by using proper money management) of successful traders."
—Steve Nison, President, Candlecharts.com, and author of Japanese Candlestick Charting Techniques
"Bennett McDowell demystifies money management for traders in his new book. With these simple, time-tested strategies, a trader will decrease the time it will take to become profitable."
—Adrienne Toghraie, President, TradingOnTarget.com
"Bennett McDowell does traders a HUGE favor in this valuable book by emphasizing the extreme importance of risk control and its vital place in a sound trading plan. Further, he provides knowledge of and access to specific tools, which enable the trader to implement his ideas simply and effectively. His simple straightforward treatment of a complex and often boring subject is a breath of fresh air and a worthwhilecontribution to this important element so crucial to the achievement of successful trading results."
—Edward D. Dobson, President, Traders Press Inc.
The best-kept secret to trading success: money management
Money management may very well be the most important piece of the trading puzzle. In A Trader's Money Management System, expert Bennett McDowell provides time-tested techniques that can turn a losing trader into a winning one—and take the winning trader to an entirely new level. In revealing his personal approach to staying out of trouble in the financial markets and maximizing profits, he offers comprehensive insights into:
  • The psychology of risk control as well as the finer aspects of setting stop-loss exits
  • The value of managing trade size and consistent record keeping
  • The process of putting together your own personal money management system
Unlike other books that focus on the complex mathematical theories behind money management, this book presents its system in straightforward, easy-to-understand terms that will allow you to quickly see how these concepts work—and immediately benefit from the value of effectively managing risk.

About the Author

Bennett A. McDowell is the founder of TradersCoach.com® and an expert in technical analysis and complex trading platforms. Earlier in his career as a financial advisor, McDowell used his own proprietary trading system to serve a community of high-net-worth clients. This system is now known as Applied Reality Trading®, or ART®, and is used by traders around the world in over forty countries. McDowell lectures nationally and writes articles for many leading trading publications, including Technical Analysis of Stocks & Commodities magazine. He is a recognized leader in trading education and is honored to be included as a member of the eSignal “Trading with the Masters” team. McDowell is also the author of The ART® of Trading, which is published by Wiley.




Solid Forex strategies for capturing profits in today's volatile markets
How to Make a Living Trading Foreign Exchange puts the world of Forex at your fingertips. Author Courtney Smith begins with an introduction to the Forex market-what it is and how it works. He then delves into six moneymaking techniques for trading Forex, including his unique Rejection Rule that doubles the profit of basic channel breakout systems. In addition to two specific methods for exiting positions at critical levels, Smith also discusses powerful risk management techniques and successful trading psychology strategies that will keep you one step ahead of the game.
  • Reveals the secrets of the Forex market and how to create a lifetime of income trading it
  • Offers advice on maximizing profits during the volatile swings that have increasingly become the norm
  • Other titles by Smith: Option Strategies, Third Edition, Seasonal Charts For Futures Traders, Commodity Spreads, and Profits Through Seasonal Trading
Make more from today's Forex market with How to Make a Living Trading Foreign Exchange.

From the Inside Flap

Foreign exchange is the most traded instrument in the world. It's not hard to understand why. Nobody needs to buy stocks, but because of today's extensive global trade we must all deal directly or indirectly with the forex world. Yet, while trading foreign exchange is one of the most exciting and potentially lucrative activities in the world, about 90 percent of traders lose money. In How to Make a Living Trading Foreign Exchange, Courtney D. Smith provides a concrete and comprehensive approach to becoming a profitable forex trader.Smith first explains all the basic information you need to know to get started in trading forex. He then introduces the tested, profitable techniques that will help you make money in the forex market, offering a variety of different methods to use over different time horizons—from those that look at the market from the perspective of days and weeks to those that hold positions for less than one day. Smith describes, for instance, a system that monitors the market from three different time perspectives and doesn't enter the market until all three are calling for an entry into the market.
He also details a new way to filter trades that eliminates about half of all losing transactions. And he tells how to sidestep the usual traps that drain money from your account using his method to identify short-term turning points and, more important, to identify major turning points. Smith concludes by showing you how all the techniques in the book fit together into a coordinated program for creating profits.
Throughout the book, the author stresses the two most important aspects of trading: risk management and trader psychology. How to Make a Living Trading Foreign Exchange shows how to take risk management one step beyond and use it as an offensive weapon for enhancing profits. And perhaps, most important, it tells how to overcome the biggest block against making money in the markets: your own psychology. Whether you're a novice or a pro, says Smith, following the techniques in this book will turn forex trading into your ticket to financial freedom.

How to Make a Living Trading Foreign Exchange: A Guaranteed Income for Life (Wiley Trading) 

From the Back Cover

Praise for How To Make A Living Trading Foreign Exchange"Courtney Smith has hit it out of the park with this book. Not only does he provide great insight into both the inner workings of the marketplace and original trading methodologies, but he also devotes much discussion to the often overlooked, immensely important aspects of trading such as money management, discipline, and psychology. After all, as he aptly opines, these are demons traders must slay to be successful."
—Tom Demark, Founder, Market Studies, Inc.
"I learned a long time ago if Courtney Smith writes it, I readit. Glad I did. I picked up three great insights in my first read-through."
—Larry Williams, author of Trade Stocks and Commodities with the Insiders, The Right Stock at the Right Time, Day Trade Futures Online, and Long-Term Secrets to Short-Term Trading

About the Author

Courtney D. Smith is Chairman of the Investment Mentoring Institute, an organization devoted to building great investors. He is also President and CIO of Courtney Smith & Co., Inc., which manages money for institutions, family offices, and high-net-worth individuals. Mr. Smith is the owner and Editor in Chief of Commodity Trading Consumer Research (CTCR)—the premier tracking service for the futures industry—and author of six books, including Option Strategies (Wiley). He has made more than 1,000 TV appearances on shows such as Wall Street Journal Report, Moneyline, and other programs on CNBC, Fox News, Bloomberg, and CNN.


How to Make a Living Trading Foreign Exchange: A Guaranteed Income for Life (Wiley Trading)


The Universal Principles of Successful Trading clearly and unambiguously articulates trading principles that distinguish the winners from the losers. Though trading can be performed in different markets, across different timeframes, and with different instruments based upon different techniques, there is one common thread that ties all winning traders together: the universal principles of successful trading. All consistently profitable traders adhere to them regardless of the markets, timeframes, and techniques.
In this ground-breaking book from top trader, Brent Penfold, the reader will:
  • Learn how to develop a trading plan
  • Learn how to identify and create an effective methodology
  • Discover successful money management strategies
  • Understand trader psychology
  • And many more exciting trading and strategies secrets.
Supporting the universal principles are rare interviews from a diverse group of successful traders. Some are the new young guns of trading and others are market legends who are trading just as actively today as they were over 50 years ago. They represent a diverse group of traders from the United Kingdom, America, Singapore, Hong Kong, Italy, and Australia. All of them have generously agreed to offer the reader one singularly powerful piece of advice to help them towards their trading goals. Each piece of advice emphasizes an essential element of the universal principles.
This timely and exciting book from Brent Penfold has already garnered many accolades and looks set to become a modern-day classic.


Review

Brent gives you the opportunity to sit down with some really great traders and learn from their good and bad experiences. This should be an invaluable experience for the reader.
--Larry Williams, Trader

Unlike most trading books, The Universal Principles of Successful Trading covers the key principles of trading success. It even has a money management chapter-a topic which most books neglect. I recommend reading this book cover to cover several times. It will change your mind about what's important in trading.
--Van K. Tharp, Ph.D., Trading Coach and President, Van Tharp Institute (www.vantharp.com), and Author of The Definitive Guide to Position Sizing

Brent Penfold has successfully provided readers with a blueprint for trading success. Not only does he cover such vital topics as trader psychology and effective money management, he also presents interviews with many successful traders and market researchers and his probing questions and their answers offer insights into their specific trading styles and psyches…a "how-to" book from start to finish.
--Tom DeMark, Founder, Market Studies, LLCThis is one of the best books on trading to come along in a long time and I predict it will become a classic. The book covers just about every aspect necessary to become a successful trader. His discussion and conclusions on the highly promoted Gann and Fibonacci methodologies might indeed surprise you. He made over 16,000 observations of Fibonacci ratios to derive his conclusions. This section alone is well worth the price for the "wanna-be" traders who are looking for techniques that work. In summary, read this book. You will be richly rewarded for your time and effort.
--John Hill, President, Futures Truth Co.Brent has compiled all the ingredients in this book. He has experience, intelligence, and knowledge that he has tapped from traders all over the world. It is so refreshing to read a book written by a "true trader" such as Brent.
--Mark D. Cook, Pro Trader and Creator of the Cook Cumulative Tick IndicatorIn my opinion trading education is delivered in two styles: quantitative and qualitative. The vast majority of information in the trading universe is quantitative-"hard-coded" information that can be replicated by the majority. However, successful trading only comes about by an understanding of qualitative learning-how you can readily teach someone to learn to lose when it goes against everything we're brought up to believe. Brent's "Just One Piece of Advice" section is one of the best attempts to get this qualitative message across. Take it. Read it. Then read it again and again.
--Nick Radge, Trader and Adviser (AFSL 288200) and Author of Adaptive Analysis (www.thechartist.com.au)This book cries out to be placed in any trader's library. Brent does a superb job of outlining, exploring and evaluating the current state of position sizing algorithms. As successful traders know, money management is one of the three pillars of trading success.  He also provides a unique trading plan. A great book!
--Ray Barros, Professional Trader and Fund Manager and Author of The Nature of Trends

This book is a "must-read" for anybody approaching the world of trading but also for skilled traders. I've read many books but this is the one I wished I had found when I was starting this adventure. Brent addresses exactly what a trader should really focus on.
--Andrea Unger, Winner of the World Cup Championship of Futures Trading® 2008 & 2009Normally when asked to review a book, I will skim through it and make a few comments.  With this book, I just kept reading-I couldn't stop! Brent has an amazing ability to tell it like it is.  His "Just One Piece of Advice" section is brilliant, and worth the price of the book many times over. If you have a genuine deep desire to be a consistently profitable trader and want to learn what traders really need to know as opposed to what most think they need to know, do yourself a favor and read this-please!
--Stuart McPhee, Trader and Author of Trading in a Nut Shell
In my 25 years in the market I have read and seen just about every trading book there is. Very few get to the crux of trading like Brent has. Get it. Read it. This is not your typical trading book, this is a comprehensive book written by a real trader for traders, everyday people who are serious about becoming successful traders.
--John (JR) Robertson, Director, I-Deal Financial GroupCrawling in the right direction beats running in the wrong direction every time and Universal Principles of Successful Trading will definitely get you heading in the right direction. Straight forward language, simple concepts and emphasis given where emphasis is needed. I wish this book was around when I started out because to master the markets now all you have to do is master this book. 
--Alan Hull
, Trader and Fund Manager and Author of Active Investing

When Brent asked me to review his new book The Universal Principles of Successful Trading I was both excited and curious. Having read his first book and recommended it to many of my clients I knew to expect something big. Brent is one of the very few authors who actually puts into practice the strategies he espouses, which lends great credibility to his words. He provides the most comprehensive approach to the various strategies of money management I've ever seen. A must read for anyone serious about trading.
--David Montuoro, Futures Broker and Director, Bellmont SecuritiesConcise, to the point, and relevant for gaining the trading skills and strategies needed to maneuver in today's marketplace, Brent provides a clear road map on how to emulate the elite traders who consistently win over the long-term. Forget the hype you hear about trading and get this book. Read it, read it and read it again. And then study it until your eyeballs drop out. Brent keeps it real and if you can too then you may just find yourself in the exclusive 10 percent winner's circle! This book is destined to become a trading classic.
--Steve Mater, CFD Business Development, MF Global

In his first book Brent hits the nail on the head with a down to earth, no nonsense explanation of what you need to be a successful active trader. I haven't seen a more practical guidebook for traders in over 20 years in the financial markets. If you want to stop being in the 90 percent of traders who lose and join the elite 10 percent who win, then I suggest you throw out all your other textbooks and read this book from cover to cover. This is a book written for traders by a trader and is the obvious starting point for a successful trading career.
--Tony Makowiak, Head of Dealing, Aliom Pty Ltd

The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets (Wiley Trading)
 

From the Inside Flap

The Universal Principles of Successful Trading clearly and unambiguously articulates trading principles that distinguish the winners from the losers. Though trading can be performed in different markets, across different timeframes, and with different instruments based upon different techniques, there is one common thread that ties all winning traders together: the universal principles of successful trading. All consistently profitable traders adhere to them regardless of the markets, timeframes, and techniques.In this ground-breaking book from top trader, Brent Penfold, the reader will:
  • Learn how to develop a trading plan
  • Learn how to identify and create an effective methodology
  • Discover successful money management strategies
  • Understand trader psychology
And many more exciting trading and strategies secrets.
Supporting the universal principles are rare interviews from a diverse group of successful traders. Some are the new young guns of trading and others are market legends who are trading just as actively today as they were over 50 years ago. They represent a diverse group of traders from the United Kingdom, America, Singapore, Hong Kong, Italy, and Australia. All of them have generously agreed to offer the reader one singularly powerful piece of advice to help them towards their trading goals. Each piece of advice emphasizes an essential element of the universal principles.
This timely and exciting book from Brent Penfold has already garnered many accolades and looks set to become a modern-day classic.

About the Author

Brent Penfold is a full time trader, author, educator and licensed advisor. He began his career in 1983 as an institutional dealer with Bank America and today specializes in trading forex and global indices. Brent is the author of the bestselling book Trading the SPI (Wiley 2005) and is profiled in John Atkinson's e-book The Stock Market Wizards of Australia. Brent publishes daily newsletters for active Forex and Index traders and is a popular and sought after international speaker who has presented to traders throughout the Asia Pacific region in Singapore, Hong Kong, Malaysia, Vietnam, Thailand, India, China, Australia, and New Zealand.
Brent is a licensed futures advisor (AFSL 225946) and holds a Master of Commerce (Finance) degree.


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