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The importance of money management in forex trading and the reasons for it

The importance of money management Forex rebate king undeniable but the problem is that it is not easy to convince some investors, especially novices In this article, Forexrebateking will show you more clearly the advantages of money management by testing the performance of real trading strategies cashbackinforex will present more practical examples of money management in the hope that you can better understand the value of management and use effective money management techniques in trading When setting stops and limits, we recommend that: the limit distance should be at least twice the stop distance, i.e. use a risk-reward ratio of 1:2 or more If you set a stop loss of 100 pips, then the limit should be 200 pips We also explain how to decide the number of trades based on the amount of money in your account We recommend that: the amount of money in each trade should not exceed 5% of your account if you If 5% of your account balance is $1,000 and your stop loss is 100 pips, then the number of lots per trade should not exceed 10. Lets simply calculate the point value of 10 lots as $10 and multiply $10 by 100 to get $1,000, which is the maximum loss we are willing to take in this trade. The purpose of this lesson is to explain the importance of money management, which is not only rooted in trading theory but can also help you to create real value in your trading. The cashback forex test uses a 1:2 risk-reward ratio when setting stops and limits, and does not use more than 5% of the account equity at any one time to take risk The first sub-optimal money management forexrebateindonesia is to use a 2:1 risk-reward ratio and set a 5% risk limit on each trade The second sub-optimal money management method is to use a 1:2 risk-reward ratio and set a 5% risk limit on each trade We believe that this test can be applied to any strategy and you will see correlations and results similar to those shown in this lesson. By comparing this, we can give you a clearer picture of the consequences of good and bad money management practices. Now we can use some charts to start our tests, but I would also like to briefly introduce the trading strategies used in this lesson. Third, set a stop loss of 100 points for each trade Fourth, test period: July 2007 – July 2009 Fifth, according to the specific money management method, set 100-200 trade money management guidelines A first look at the first chart, here we show the results of the standard money management method test, using a 1:2 risk The first chart shows the performance of the first sub-optimal money management method, where the stop loss is set at 100 pips and the limit is set at 50 pips, i.e. using a risk-reward ratio of 2:1, so the risk we take on each trade is a profit. In order to ensure that we were really focusing on the first guideline of money management, we limited the maximum risk we took on each trade in this test to 5% of the account equity, so the only difference between the two tests was the risk-reward ratio. management approach performed almost identically to the first sub-optimal approach, mostly only slightly better This is because although both approaches use a 100-point stop loss, the standard approach uses a 200-point limit while the sub-optimal approach only has a 50-point limit, so the standard approach is more likely to recoup losses and therefore performs slightly better in the first year than the sub-optimal approach does in the first year using a 1:2 risk However, when we compare the performance of the second year, the standard method does outperform the second best method, so our argument is more convincing. First, using a risk-reward ratio of 1:2, we can make twice as much profit when we win as we lose when we lose, even if we have less than a 50% chance of winning, we can easily win more than we lose; second, the standard strategy has a higher net starting point for the second year, and although the difference is small, it is still higher than the second best method. The standard method can recover losses faster than the second best method; and when market conditions are better, the standard method does outperform the second best method regardless of the strategy used and the market conditions. In the first year, using the second best method, the average loss per trade was 16 pips, while the standard method lost 14 pips, although the difference is not significant, but it also highlights its strengths. This is because: when the trend is favorable, the standard method seeks to win more, so it takes longer for traders to build each trading strategy while the trading strategy remains the same, so the average profit for both methods is about the same, but the number of trades built by the second best method is 29 more, so its overall loss is greater. When market conditions favor the MACD trading strategy, the standard method clearly outperforms the second-best method, with an average profit of 21 points more than the second-best method. In addition, we can see from the number of transactions that the standard method has been outperforming the second-best method, as the second-best method has a lower win target than the standard method, it has created 18 more transactions than the standard method, while the number of transactions and losses created by the standard method are less than the second-best method. But please look at the chart, which method is not only winning but also winning more? It is the standard method of testing and this is mainly because: setting stop and limit ratios are different setting at least twice the risk of loss can also achieve a 40% or higher chance of winning and also create a less stressful trading environment for yourself following the two guidelines will not allow you to win on every trade, but if your trading strategy is not very effective you can reduce the number of trades, that is to say, reduce the number of trades. This chart shows the performance of the second best method of testing, where we use a 1:2 risk-reward ratio and a maximum of 5% of the account equity to take the risk, so both tests have the same stop and limit distance of 100 pips and 200 pips. But the size of the equity at risk is different, 10% and 5% respectively. In the second best method test, more of the equity of the account is at risk for each trade. It is worth reminding that leverage is a dangerous tool and needs to be used with caution and dont forget that leverage is only useful if you trade right. We can see that the two methods follow each other closely, but the amplitude and rate of the next best test is magnified. I have to admit that if another trading strategy had been used or if market conditions had been different, the downside of the Next Best Method would not have been as large in the first year, but for the purposes of this lesson, I am satisfied with its performance because its larger downside can affect trading psychology. Can you honestly ask yourself if you can afford such a loss? Even if you could, would it be worth it to take such a big risk with leverage to get a potentially higher return? You may say that the standard method also brings big losses, up to 40% at the worst times, but that is not the point. We do not focus on the winning performance of the two methods, but on the relationship between the two. Most people may be willing to put more of their account equity at risk at any given time because they hope and expect to make more profits, but these charts again show the strengths of sound money management. We all know that there are uncertainties in the future and we cannot know if the market is positive or not, but we can maintain more equity in our accounts and stay in the market longer by limiting our exposure to the risk. From the above example we understand the risks of using leverage and why we recommend not to use more than 5% of your net worth at any one time to take risk.
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