• December 19, 2016

Importance of money management in Islamic trading community

Nowadays a lot of Muslim traders start their career in forex trading. The popularity of forex trading is increasing in Islamic community only because lots of brokers is now offering Islamic trading account which is swap free that means Muslim traders are doing trading in a halal way .Muslim traders are comparatively new in this market and they need to know about the risk in fx trading. They have to understand the market movement and take the benefit of the fx trading. Almost every trader will agree that money management is the most important thing in forex trading.

But the fact is only a few of them can make the right decision and execute proper risk management when they are trading in the real market. You will be shocked when you know that only 20% – 40% trader use the money management in their every trade.  Most of the new trader wipe out their trading account within two to three months. The main reason behind this scene is money management. In this topic, we are going to discuss the importance of money management for Muslim traders.

Why money management should be used in every trade

Money management is one of the toughest jobs for the trader because trader needs to monitor their trade and put a defined risk and stop loss for each and every trade before they enter the forex market. Only a few people are doing these and that’s how they are making money from fx trading. If you lose 25% of your trading account you need to gain 33 percent in order to make it equivalent to your deposited amount. In that way, if you lose fifty percent of your original money you need to gain one hundred percent to make it equivalent to your initial deposit. This shows us how much afford you have to give to regain the original amount. That is where money management stands up, if you only take one or two percent risk then you probably end up with positive gain. If you take one percent risk in every individual trade then if you lose fifteen consecutive loss then you will lose only fifteen percent of your account. There are different money management style and you can choose any single one of them based on your personality and risk tolerance level.

Types of money management

A trader can use many different stop level and strategy to determine how much risk they will take in an individual trade. In this way, they save themselves from losing large amount money. Now we will discuss how we can measure and minimize our losing trade by putting the stop loss in perfect position.

Specific amount of risk

This is the easiest way to put a stop loss in your trade. if you use this method this mean if you are taking two percent risk in you trade then will find out how much money  you can afford to lose  in  that trade. For example, if you have 100000 $ in your trading account and you are taking Two percent risk that means you can afford to lose 2000 $ in that trade. So if you give a trade in 1 standard lot in mt4 platform then your stop loss will be 200 pips. You can take highest five percent risk from your account balance which means you can take 5000$ risk per trade. This is the highest amount you can risk from your trading account on any single trade. But that can also hurt you if you are going to lose ten consecutive trade that means you are going to lose 50000 $. Your account balance will be the reduced to half, from your original balance if you lose 10 trade in a row. That’s why most professional traders always suggest not to risk more than 2% your trading capital in any single trade.

Use stop level on the basis of technical analysis

This is the best method to implement risk management factors in an open trade.  If you look at the mt4 platform you will see and find few technical level which allows you to determine how the market might react if that level is broken. Use the price action and key support and resistance level to determine your stop loss. Always make sure that you are not risking too much money on any single trade. After a big trending movement market often retrace and ultimately it goes along with the trend. For this reason, you should also execute your orders in favor of the long-term prevailing trend in the market. So use technical parameter for setting up your stop loss in the market. If you don’t do so then the price might hit your stop loss level and rebound in your way.

There is a huge benefit if you use that method because it allows you to take a smaller risk and gain huge profit from the market. For example, if you execute a buy order in your mt4 platform and you saw a key support level just a few pips lower from your entry point then you should set the stop loss just a few pips bellow the support level. So as a professional forex trader you should not use stop loss with a fixed pip range rather you should use the key support and resistance level in the market for setting up your stop loss.