The Importance of Forex Money Management for Fund Managers

Forex Money Management is the concept of controlling risk to equity while trading the global markets. While using money management, traders have a pre-determined equity risk level depending on the market and how confident the trader is in the direction he/she is taking in the market.

Lack of money management skills is one of the causes for new traders to get into drawdown within a short time after beginning to trade.

Good use of money management skills by traders not only allows the traders to limit their downside risk but gives them a good chance to have consistency and would allow them to use these skills not only for themselves but also to take it to the next level of managing a fund.

Why is this important to money managers?

It is vital for money managers managing client funds to have money management skills as it allows them to show consistency to their clients and gives their clients the confidence to invest with the money manager.

• Mitigating risk and exposure in the market at any given time. Funds invest in the market with the sensible allocation of risk, and so if the trade goes against them, they have time and capital to control risk.
• Allows traders to diversify exposure and introduce hedging mechanisms when needed.

What are the top 3 mistakes money managers make when it comes to managing funds?

• 1. Not setting maximum draw-down limits. Not having pre-determined maximum drawdown limits leaves the window open for behavioral mistakes such as holding on to losers that money managers end up closing very late. It is important for money managers to cut losing positions early if their set criteria are not met.
• 2. Not having a growth mindset. Most money managers focus on trading as opposed to growing the funds under management. A growth mindset involves having a good risk to return ratio and sticking by it to ensure winning trades compensate for losing ones and that there is consistency in the growth of the account.
• 3. Not having a good risk profile. Money managers need to have a calculated approach to markets, ensuring that they allocate capital according to their risk appetite and not risk the entire account. An example of this would be allocating 80% of the trade to non-volatile instruments like ETFs, 15% to FX and the remaining 5% to highly volatile instruments like crypto.

How can aspiring forex traders scale up their current strategies to take on client funds?

For traders to scale up their strategies, they need to manage risk and focus on growing their accounts and ensuring consistency by having a good risk to return ratio (RR ratio).

For example, a 5:1 risk to return ratio, whereby if trading FX and aiming for 50 PIPs profit target and you limit your stop loss to 10 PIPs. This would ensure if you take on 5 trades and only one trade wins the trader would break even (this does not take into account overnight financing fees). This will inevitably help improve your trading performance.

Also, many fund managers employ risk management strategies around the fixed percentage money management rule. This means you will never risk more than say 1-2% of your overall capital in a single trade at any one time.

Nowadays, all traders have the flexibility of lot sizes, from micro FX contracts to a mini lot, all the way to a full lot. But it is the flexibility at the lower end that allows fund managers to scale in and out of positions according to their account size.

What you need to know about forex martingale money management.

Martingale strategy was introduced by a French mathematician called Paul Pierre Levy. It involves doubling the trade size every time a loss is faced. The theory of this is you regain whatever losses you incurred earlier.

• Amount spent on trading may increase to huge proportions after a few transactions
• If a trader runs out of funds and exits strategy, the losses can be disastrous
• The risk to reward ratio for martingale is not reasonable, i.e. higher amounts spent with every loss until a win and the final result is the initial investment.
• Strategy ignores associated transaction costs to trade.
• Broker trade size limits may be a hindrance to the strategy. Hence a trader does not get an infinite number of chances.

Do professional traders consider money management their edge?

Professional traders consider money management to be their edge in the market. The reason for this is, that by managing your downside risk and capitalizing on the upside, consistency will be achievable and drawdowns will be minimized.

How can ACY Partners help you?

At ACY Partners, we specialize in helping fund managers establish the foundation they need to take their client base to the next level.

Our seamless setup allows you to focus on the business of trading and acquiring clients, while our back-end solutions allow for easy onboarding and client deposits.

Over the years, we have helped countless traders look after their managed forex accounts, with complete reporting and analysis via our client portal.

We take care of the important details, so you can get on with your fund, and apply your edge, such as your strict money management rules.

Reach out to our team today and open the conversation, so we can find out what direction you would like to take your fund.