The Authority’ on Price Action Trading. In 2016, Nial won the Million Dollar Trader Competition. This forex trading income calculator excel possibly be the most important Forex trading article you ever read. Money management in Forex trading is the term given to describe the various aspects of managing your risk and reward on every trade you make.
If you don’t fully understand the implications of money management as well as how to actually implement money management techniques, you have a very slim chance of becoming a consistently profitable trader. However, many traders do not completely grasp how to fully take advantage of the power of risk reward. Every trader in the market wants to maximize their rewards and minimize their risks. This is the basic building block to becoming a consistently profitable trader. Many traders do not take full advantage of the power of risk reward because they don’t have the patience to consistently execute a large enough series of trades in order to realize what risk reward can actually do. Risk reward does not mean simply calculating the risk and reward on a trade, it means understanding that by achieving 2 to 3 times risk or more on all your winning trades, you should be able to make money over a series of trades even if you lose the majority of the time. We can see in the chart below there was an obvious pin bar that formed from support in an up-trending market, so the price action signal was solid.
Now, with a reward of 3 times risk, how many trades can we lose out of a series of 25 and STILL make money? You might get 18 losers in a row before the 7 winners pop up, that is unlikely, but it IS possible. Unfortunately, most traders are either too emotionally undisciplined to implement risk reward correctly, or they don’t know how to. Meddling in your trades by moving stops further from entry or not taking logical 2 or 3 R profits as they present themselves are two big mistakes traders make.
They also tend to take profits of 1R or smaller, this only means you have to win a much higher percentage of your trades to make money over the long-run. Position Sizing Position sizing is the term given to the process of adjusting the number of lots you trade to meet your pre-determined risk amount and stop loss distance. That is a bit of a loaded sentence for the newbie’s. So, let’s break it down piece by piece.