Each day thousands of Forex traders around the globe beat themselves up psychologically for not having the good sense to trade using protective stops. Forex money management requires the use of a stop-loss on every trade regardless of any fundamental or technical indicator. Properly used, a protective stop allows a trader to calculate the risk involved with a trade and practice good Forex money management. There are several types of protective stops and traders should learn how to use each one and then develop a trading style based around their particular trading philosophy.
In developing a trading strategy, you should never risk more than 2% of your entire account on any individual trade. Therefore, using a simple stop would mean calculating 2% of your trading account and placing the protective stop at that point on the chart. for example, if your account is currently at $5000 then a 2% loss would be $200. Therefore, any trade that you place can allow for a loss of $200 before being closed out. not only is this good Forex money management, but it allows you to trade for a longer period of time.
More advanced traders may find a simple stop does not fit their trading philosophy. Therefore, they will develop trading stops based on technical patterns noted on their charts. These patterns are usually based on high/low swings, trend lines or Fibonacci related points. There are a number of different tools traders can use to develop their own particular stops, however all stops should be within the acceptable range of loss for your account. this means that no trade will never put more than 5% of your entire account at risk.
Sometimes active traders will use wider protective stops based on the activity and volatility of the market during certain periods of the day. between the hours of approximately 4 AM New York time and 2 PM New York time, the Forex market is more active than at any other time during the day. It is during this time that wider swings occur, and the potential for the market to move both up and down by a significant amount can be expected. Therefore, expanding protective stops becomes a viable trading strategy as long as good Forex money management techniques are employed at all times. Traders will often use technical indicators, such as Bollinger bands, in order to place protective stops outside expected price movement based on historical performance.
A full margin stop is an aggressive form of gambling. at times experience traders will set up a trade which puts 100% of an account at risk. this is normally done when they have a strong belief that the market will move in a particular direction for a significant amount of time. however, the amount of money at risk will be exactly that, risk capital, and they understand that it could all be lost but that it may provide an unlimited reward should they be correct. the margin stop is occurs when your account is empty, the account is closed and the trade is over. this trade is not for the faint of heart, nor should it be employed on a regular basis without significant experience and knowledge of fundamental analysis.
In conclusion, Forex money management requires the proper implementation of a protective stop-loss point for every trade. Regardless of the aggressiveness of your strategy it is important to maintain trading discipline and monitor the use of trading capital at all times. Money management in the Forex market is how you survive, how you maintain your equity and most importantly, how you profit.
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