Money management is an important skill whether you are a day trader, investor, or any professional. It is simply the process where you attempt to optimize your profits while minimizing risks. In this article, we will look at some of the top money management strategies you should use when using robots in forex trading.
Backtest the forex robot
For starters, a forex robot is software that allows you to automate your trading. It can analyze the forex pairs, identify potential buying or selling levels, initiate a trade, and even stop it. Other forex robots are designed to send automated signals when certain criteria are met.
Further, you can easily develop your own robot if you have experience in trading and coding skills. Alternatively, you can buy one in popular marketplaces like MQL4 and 5.
An important money management skill when using robots is to backtest or stress-test it. This is a process where you use past data to test how the robot behaves. Fortunately, most trading platforms like TradingView, MT5, and Ninja Trader have platforms to simplify your backtesting process. Before you use it in a live account, you should stress-test it in all market conditions for at least two months.
Back-testing is an important process for several reasons. First, it will help you model the future performance of the robot. You should move forward with it if it performs well in all market conditions. Second, it will help you identify the challenges of the robot and how you can improve it. Finally, backtesting the robot will help you identify the market conditions in which it performs well.
Leverage
Leverage is very popular in forex trading. It simply refers to a situation where a broker lends you money to magnify your trading results. In Europe, because of MIFID laws, the maximum leverage the broker can offer is 30. As such, if you have a $1,000 account, you can trade as if you have $30,000. In good times, leverage can help you magnify your trades substantially. However, in case of a loss, you will lose more money.
A good example of leverage gone wrong is what happened in early 2020 when Bill Hwang lost more than $20 billion in a few days. This happened when his lenders, known as prime brokers, decided to close his overleveraged trades as shares in companies like ViacomCBS started to sink. He had a 5x leverage.
As a forex trader, whether you are doing it manually or using a robot, you should always think about the size of your leverage. Ideally, you should always be cautious not to use too much leverage because it will expose you to substantial losses. If you are just starting, we recommend using a leverage of less than ten and then increasing it periodically.
Trade money you can afford to lose
Another important money management strategy when using robots is on the amount of money you want to trade. As you already know, forex trading is a risky business where more than 80% of traders lose money. Therefore, a key rule is that you should always day trade money that you can afford to lose.
There are several things you can do to find this amount. First, we recommend that you conduct a self-assessment to establish your net worth. This is where you look at your assets and liability and establish what you are really worth. You should also factor in your cash flow.
After finding your net worth, you should find the amount of money that you are comfortable using to trade. These funds should be the surplus funds that you have. For example, if your net worth is about $500,000, you can easily afford to trade with $10,000. In other words, ensure that:
- You are not taking a loan to day trade. Borrowing funds to day trade can be highly risky.
- You are not using important funds to trade. These funds include medical, education, or shelter funds.
- You are comfortable losing it all. Since it is possible to lose all your money, ensure that you will be fine if you lost it all.
Size of your trades
The size of your trades matters. Ideally, a bigger trade will expose you to a bigger profit if the trade goes right. A smaller trade, on the other hand, will expose you to a smaller profit. For example, in stocks, if you buy 100 shares of a company, you will make more money than a person who buys 50 shares. The same applies to the stock market, whether you are using a robot or not.
A forex trading robot will mostly tell you to set parameters of the lot size. If you place the lot size of 0.5, it means that this is the size that the robot will always open. Similarly, if you open a lot size of 2, this is the size that the robot will open.
Therefore, we recommend that you set a smaller lot size, especially in your early days. Doing this will help you see the performance of the robot while not putting your account into a substantial risk. You should then increase the size of the trades gradually as you see how it is performing.
In line with this, you should always ensure that your robot has stopping tools. This simply means that the robot should add a stop loss for any trade that it implements. Doing this will help ensure that your trades are protected in case of any eventuality.
Summary
Money management, also known as risk management, is the backbone of all trading. Indeed, in the past, we have seen many excellent traders lose money simply because they did not have quality risk management strategies. Therefore, using some of the strategies mentioned here will help you have peace of mind when you are trading. It will also help ensure that you remain in a solid financial situation no matter what happens.
