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Posted on Jun 28, 2019 at 11:04 AM
Are you trying to prevent your funds from burning out or looking for a more efficient way to manage your equity? Then you should see this piece, we both know no standard house is built without a good architectural plan! So if you intend to build your account up to a profitable point, then you must create a plan. This may be the 100th time you have heard it, but here is how to apply it.
Often times, Forex traders lose their account not because they do not know how to trade, but because they do not know when to stop trading and when to protect their funds.
Yes you may do a good job, spotting out the perfect entries and exits and infact more than 80% of the time you're on profit, BUT sometimes with just one loss, you either lose all your profit or sometimes the entire account.
Before we go into equity management, for the sake of young traders who are just joining this coulmn and the Forex market, Equity in Forex trading is simply the total value of a trader's account at every point, either while on trade or not. (Let's just say it's your account balance, while on or off trades.)
When a Forex trader has active positions in the market (during open trades), the equity on the FX account is the sum of the margin put up for the trade from the FX account plus any unused account balance, while when you are not trading, your equity is exactly what you have left in your acccount balance.
So at this point we can say that equity management is how you manage your equity aka your trading account balance as you trade to ensure that you stay profitable.
Today, I am going to share some powerful tips that you can apply in managing your equity if you haven't being doing that and how to be more efficient with your current equity management plan if you've got one at the moment.
PS: Before I go on, please note that when ever I refer to profitablility, I mean that, your account balance is above the captial invested. Personally I think that this is the true measure of profitability and not by how many closed trades ended in profit.
Here are powerful equity management tips that would help you ensure are truly profitable.
1. Be strategic and intentional by calculating your risk-reward ratio before you take any trade: No standard house was built without an architectural plan, there always have to be a plan! So if you intend to build your account up to a profitable point, then you must create a plan, this may be the 100th time you have heard it, but here is how to apply it.
Before you take any trade, pick a realistic profit target for the day: Say you made a deposit of $100, your set target could be to increase your account by 5% daily and 20% weekly. (IE $5 daily and $20 weekly). *remember to be realistic*
Prepare for the volatility: Experience has taught us that the financial market is no respecter of persons or strategy, so you must be prepared for the market by controlling how much can leave your account when the market doesn't agree with your analysis. (Ie how much you are willing to risk from your deposit versus how much you are targeting to earn other wise called RISK:REWARD RATIO)
Following our illustration above, if you plan to make $5 daily, how much are you willing to lose? $1 or $2? Consider this carefully and you may just find you ideal exits for each day's trade and also this may help you to narrow down the pairs you should trade daily.
2. Never Under-estimate Automatic Exits: Except you have all day to seat in front of your device to monitor the charts, it is best to use the automatic exit options such as take profit and stop loss. It's your power!
Since you already know how much you are targeting, (IE targeting $5 and risking $2.5) how many trades would you need to take daily, 1 or 2? Let's assume you pick 2, then on each trade you could be considering taking a 0.25 lot on a target of 10 pips (0.25*10= $2.5) with your provision for loss set for 5 pips + spread (so that your trade has enough space for draw-downs/price fluctuations).
If you are an emotional trader, one of the best way to deal with this is to use your risk reward to set your stop loss and take profit, close the charts and go about your day's business while your broker execute the stops as you've commanded.
Note: The recommendations above are curved from different trading experiences and you as you execute these tips, do so with your style of trading, equity and time availability in mind because we may not have exact same opportunities.
Here's a quick evaluation that will give you a deeper insight into your current equity management:
1a. Do you currently have a plan?
1b. How potent is your plan?
2a. Do you use the risk- reward ratio?
This evaluation will help you to see how well you are managing your equity at the moment and prepare you for the next series of this topic, where I will be sharing 3 more tips to round off the topic.
The assessment above is a self assessment and if you think you have missed out on creating a plan from the beginning, this is the perfect time to start implementing and changing the way you to trade if you want to scale up your profits.
Let me know if this information/article is useful to you in the comment section and I will ensure to remind you when the concluding part is published.
Until next time, stay profitable and happy trading!