Forget about Forex trading techniques. Forget about ebooks, seminars, strategy and trading software. This is all useless information if you fail to understand and digest the single most important rule of trading: money management. Before even thinking about opening an online trading account, you should be 100% sure you comprehend the importance, weight and value of managing funds.
Our Forex money management manual is here to not only help you understand the significance of money management as a concept, but give you actionable help on how to mitigate losses, and make your trades profitable.
This one is a bit tricky as emotions and human nature go hand in hand. To be able to take emotions out of any aspect of life is a very unique, almost rare attribute. When it comes to trading though, emotions can actually cost you money. When you lose a trade, you’ll instinctively want to get your money back in the next trade. That’s not the way to go about it. Come up with a written strategy, allow yourself some wiggle room for both a scenario where you make profit and a scenario where things don’t go your way and stick to the plan. Don’t get excited by profits, and don’t get emotional after a loss. Trading has its ups and downs by nature. Your emotional balance and psychology should not follow the charts or pips movements. Study, analyze, plan and execute.
There’s no better feeling in the world than being proven right. Especially when that feeling comes with an added bonus in the form of money from a winning trade. Now let’s turn the table and see things from the losing side of a trade. The feeling is obviously not a nice one so don’t prolong it by getting your ego involved. Your analysis, charting and overall outlook might have been pitch perfect but the Forex market is so volatile that it’s inevitable you’ll be proven wrong on many occasions. This is where things become interesting though. Most traders see a losing trade as negative, as something they want to leave behind them as fast as possible and move on to the next one. Don’t be in a hurry to move on. Losing trades can be used as valuable teachings, as material you can analyze and learn from.
It goes like this: traders want to make profit fast, they get impatient, they get aggressive with their trades and end up losing money. Rome wasn’t built in a day and nor will your trading winnings. Patience coupled with ability to trade according to the volatility of the currency you’re trading for is a winning combo. Adjust your position, react to the volatility of the pair and you’ll immediately see a healthier account balance.
In a nutshell, a stop-loss is arguably the single most important tool for Forex money management. What this tool does is protect and insulate your account when a trade goes against you. By setting the correct stop-loss limit you are essentially capping the losing potential of a trade, shielding your account balance from extreme fluctuations. Using the same logic, knowing when to exit a winning trade is as important. Setting the correct take-profit levels will enable you to leave a trade when the time is right. Talking of winning trades, it is important to mention reward-to-risk ratio. As the name very clearly states, this ratio calculates the amount of risk you trade for a certain position compared to the amount of potential reward. If you want to be a trader, using smart tools like stop-losses and reward-to-risk ratio will give you a great sense of empowerment, a sense of control of both your funds and your trading strategy. It minimizes risk and at the same time it buys you time.
It is crucial to understand leverage and its implications before diving into it. Forex leverage is no different in principle than financial leverage or borrowing: it basically allows you to maximize your profits without having to maximize your investment capital. Whilst it all sounds great when you first hear it, leverage comes with high risk and potential for higher losses. To better understand leverage here’s an example: a leverage of 1:200 on a $500 account balance translates into a trade of up to $100,000. As a new trader, be very careful when engaging with the leverage game as brokers use it as one of their main strategies to fuel the early trades of a new account holder.
When we say know the risk we’re not referring to risk as general term but more as a unit. Every time you enter a trade, attach a specific number to it. In simple terms, write down the amount of money you’re willing to lose if the trade goes south. That way, you’re not only preparing yourself psychologically to accept the loss but you’re also shielding your account from suffering greater losses. This all comes back to an earlier point we touched upon, having a solid, written-down plan that you follow to the t.
You might see this as an obvious choice but trust us when we say that more often than not, people will dive into their trading endeavor head first. What ends up happening is they spend money they did not have to spend, merely learning and getting accustomed with the ins and outs of the trading world. Platforms like the MetaTrader 4, charts, pips, positions and he entire universe of trading needs patience, time, experience and knowledge before you get a hold of it so until you feel confident and ready to take the plunge, use a demo account. That will teach you a lot and allow you to make mistakes that have don’t make your wallet any thinner.
Here you have it. A list of tips, tools and overall help on how to manage and smartly handle your money when it comes to Forex trading. For more articles like this one, keep checking our blog as there’s a lot to come from where this came from.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.
Risk warning: Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65.38% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Please consider our Risk Disclosure.