Psychological Analysis and Money Management Analysis in forex trading
Achieving financial success in the markets is not easy. It takes discipline, determination and a well-tested plan. Despite what some may say, the skills needed to become a successful and a professional trader is not pure. Anyone can learn. And, as business guru, it’s more about mentality and psychology than anything else.
The reason why psychology is so important to becoming a successful professional is that much of what you have to overcome is counter-intuitive. Reduce your losses and let your profits run. It is one of the golden rules of trade. We all know it. But following this rule when you are in the trenches is the most difficult part; goes against what many of us consider the “natural” thing to do. Our tendency is to let our losses run in the hope that they will reverse and to reduce our profits for fear of losing them.
The point is, there are literally hundreds of perfectly good entries and there are so many ways to make money in the markets; but that’s not what makes a good system. At the heart of any successful system is the same essential element: excellent management of commercial money. You must have a method to protect your capital. No system will be negotiated with 100% accuracy. It only takes one bad trade to lose everything and that is why money management is so important.
Besides your psychology, the most important aspect of trading is money management. That said, so far, I have yet to find a course explaining this essential aspect of negotiation, as I think it needs to be explained.
If you are not currently successful in the market or if you are not achieving the success you want to achieve, the problem is probably an unsatisfactory discipline in managing the money being traded. It is one thing to know these rules; another is to apply them. To know the exact principle that guides money management, you need to know the strategy behind risk reward ratio.
The risk reward rate is now a risk management tool used in forex trading. Emphasis is placed on how the reward is linked to risk in a trade. Risk is the amount the trader invests in a business, while a reward is a profit the trader expects to make in a trade. The reward is the failures in which the exchange rate increases in a trade.
Risk reward strategy
The risk reward strategy is a rule that forex traders use to control trading risks. An example of a risk strategy is to define a stop / loss. A trader should never close a transaction with a risk-reward ratio of less than 1: 2 and a beginner 1: 3.
Applying the risk reward rate provides predefined and well-calibrated exit points. If the trade does not offer risk and favorable reward, it should be avoided, which would eliminate poor quality business.
If the target is achieved in return, the position will be closed and the target price will be established based on the current risk reward strategy. If the stop loss is reached, the manageable loss will be accepted and the transaction will be closed before it becomes a larger loss. With that, there is no confusion about what to do; an exit was planned for pre-determined non-profit exit points.
The actual calculation of the risk-reward ratio depends on the currency pair traded and, due to the many preexisting variables in calculating the maximum value of a transaction, it is easier to explain the use of the fixed price with actions. If you trade a $ 50 stock, your goal is $ 55 and your stop loss is $ 1, the stocks will have to move only 10% to reach $ 55 oz 2% for the stop loss, which creates a reward 5: 1: the risk.
Depending on market conditions and the economic calendar, some currency pairs will move 10% in a week or two. I would never set up a transaction with a reward risk ratio of 1/1 and I would always accept a reward of 2: 1 oz 3: 1. This means that a bigger change is necessary to reach the objective. , but it is worth entering the transaction.
A successful and broad trader finds a strategy that will help generate a high risk-reward ratio. Vendar, it is necessary to have a relatively conservative price to obtain the desired proportions
As a general rule, make sure that your whole business risks rewarding at least 1: 1. If you get a reasonable advance, but the risk of reward is terrible, don’t accept the deal, let it go. There will always be many better opportunities on the market. It is also essential to have a business plan before starting an exchange. Be disciplined, control and manage your rate of return on risk in forex trading, so that your trading account displays the rewards of your hard work!