Many forex traders lose money in the market because of inexperience and because they lack the discipline to follow the money management rules of the forex market. The forex market is a volatile one and is therefore equally risky for both the new and experienced traders. Money management is, therefore, a very important factor that determines the success of a trader in the forex market.
If You Are a Beginner
If you are new to the forex market, the first step is to seek the right money management education. Firstly, it is wise to use a demo account to practice trades before entering the real market. This will help to give you a basic understanding and help to manage your money smartly.
Once you are used to a demo account, then it is time to enter the real market. It is recommended that you set apart an amount of capital for trading that will not otherwise adversely affect your life. It is also good to have other investment options by the side to hedge the risks that you are taking in the market. The money management principles are easy to follow and will save you from losses if you follow them properly every time you trade. Given below are some of the most important money management tips.
1. Have a Trading Plan
It is most important to have a clear trading plan before embarking on the market. This will include the money management methods. Following the plan should be done strictly and this will help to keep your emotions in check. The plan will clearly define when you enter and exit trades to build discipline and to cut your losses as well as improve your profits.
2. Understand the Risks
It is important to accept the fact that there is a chance that you can lose money on a trade. Similarly, profits should not emotionally overwhelm you. At such times, you should realize that you have to suffer losses as well. For every trade, t is important to realize the risks before thinking of the rewards. It is also important to note that it is better to make smaller profits from many trades than make a large profit from a single trade. Do not develop the mindset of a gambler as it can lead to high losses over time. Always be aware of the money that you can afford to lose. You should be willing to add a little amount of money to your deposit as losing money through trades out of your capital is not very encouraging.
3. Use Stop Loss
When you lace a trade in the market it is best to place a stop loss order. This will protect you from high losses if the market turns unfavourable suddenly. The stop-loss should not be more than 2 percent of the trading balance for any trade. For a balance of $20000, the stop-loss order should be 40 pips for a trade. The maximum amount that you would lose is $80 in such a case. The different types of stops in forex are volatility stop, equity stop, margin stop and a chart stop. Though a stop-loss order cannot prevent losses, it will help its restriction. Using a stop-loss will stop you from waiting for the market conditions to get better.
4. Use Leverage to Your Advantage
Forex brokers sometimes provide the convenience of trading for larger profits to their clients. However, traders have to be careful when using this facility because leveraging also increases the potential for greater loss as it does increase the potential for higher profits. For a beginner, it is a good idea to avoid high leverage. Only experienced traders may be able to handle the high leverage offered to them. It is good to be cautious anyway.
5. Some more advanced money-management tips
Money management is a challenge for both beginner and advanced forex traders. However, those traders that use the principles of money management consistently become successful over a period of time. Successful money management requires that the traders should have some basic discipline.
6. Survival is important
For a forex trader, survival is more important than making profits in the beginning stages. Large amounts of losses have to be prevented. Therefore it is imperative that the trader uses stop losses discriminately. If you always seem to lose by placing stop losses, it is a good idea to analyse the stops and observe as to which of those were useful. The levels may be adjusted for better results.
7. Calculate the risks
You should calculate the risks before placing a trade. If the chance to win a profit is lower, it is a good idea to stop trading. A trader’s calculator may help you to calculate the risks beforehand.
8. Lost capital and what you should do
If you lose 20 percent of your trading capital, it is important to realize that you need to make a 25 percent profit to cover this lost capital. This is not an easy job. You also have to note the other expenses such as spreads and commissions. Ensure that all these put together does not have a negative impact on your finances.
9. Use Protective Stop-losses
Use stop-losses that would result in a profit for you. You will end up with a profit even if the price changes drastically.
10. Do not Stress Yourself
There is no point in becoming stressed during the trades. This can further deteriorate bad positions.
11. Do not be Greedy
Greed can cause the trader to take wrong trading decisions. No trader can place winning trades every time he opens a trade. However, the trader should learn to open the right trade at the correct time. The trader should also close the wrong trades before they can cause more harm.
Following these money management strategies can help you to improve your trading results.