Forex traders are always expected to follow forex trading systems. The reason for this is that these trading systems usually contain within them well thought out forex trading strategies for various aspects of forex trading. For instance, FX trading systems contain the very important component of money management.
A money management plan is indispensible for a forex trader because it is this component of FX trading systems that prevents inherent market risks from affecting the forex trader.
Therefore, if you are on the verge of devising trading systems to guide your forex trading efforts, you should make sure that you include a money management plan in it. Here is a step by step procedure that should help you create a money management plan to include in your fx trading systems.
The Nature of Your Forex Trading
The first step for you should be to specify what the nature of your trading is. This means defining the size of your account capital, the amount of money you invest in each trade and the amount of money you are making for each trade. This would also be helpful when you work on other components of your forex trading systems.
Figure out Target and Stop Limits
You would next figure out the number of pips you are targeting for specific trades and the exact position of your stop loss levels. Your pip target and stop limits would depend entirely on the type of analysis that you have conducted and the type of trade you plan on implementing with your forex trading systems.
Create an Umbrella Target
You need a long term target to help you structure the money management component of your trading systems. For instance, if you have ‘A’ amount of money in your account then you can create a simple target of turning it into ’2A’ in under 12 months.
Rules Of Engagement
Your forex trading systems should also be designed to limit you because sometimes emotional reactions can see you make serious mistakes. Within your money management plan, you should specify your rules of engagement. Examples of this include walking away for a day or two after three consecutive losses or even after considerable profits.
Size of Each Trade & Number of Lots
The amount of money you invest in each trade is important, especially in relation to your total account size. Ideally, your forex trading systems should be based on the principle that you would not invest more than 2 percent of your account equity on a single trade.
With this kind of a setup, even if your trading systems let you down three or four times in a row which they can when the market acts up, you would only have lost 6 to 8 percent of your total account equity.
The number of lots you trade would also have a bearing on your financial future which is why your forex trading systems should cater to this aspect as well. Defining the size of trade and number of lots would allow your trading systems to minimise risks in the market.
Get a free Forex PDF PLUS:
- 14 Video Lessons
- Free One-on-One Training
- A 5000$ Training Account
- In-House Daily Analysis
- Get FULL ACCESS