Foreign exchange money management is what brings about the variation between successful forex traders and unsuccessful ones. Most people are either ignorant of forex money management or are just too idle to even think of managing their forex money. More often than not, neglecting the management of foreign exchange money results in great losses.
Foreign exchange money management involves the self-imposing of particular rules so as to enhance effective management of their money, diminish losses, maximize profits, plus expand their trading account’s magnitude. Money management is more of protection of one’s money. You can abide by the following tips to aid you to manage your forex money.
1. Trade Only What You Are Willing to Lose
This is the number one advice you should abide by always with every trade you make. You should set in your mind to only trade that which you are willing to lose. Avoid going beyond your means. Have a set of limitations or boundaries as to what you are willing to lose should the trade act against your favor.
You can establish a given loss target for a given trade period. That target is what you are okay losing. Therefore, the moment you get to that loss target, you need to halt all your trading. This can be difficult, but it calls for discipline to achieve this.
The notion behind this tip is that the magnitude of loss you will experience will not bring about any life change, should you experience it. Therefore, ensure that you are not risking money that you are going to require to meet life essentials such as rent, food, work commute, plus mortgage payments.
You must realize that it is never a guarantee to make it in the forex market. The forex market is not the ultimate money maker. Hence, avoid risking what you are not willing or ready to lose.
2. Measure Your Risk for Every Trade
Given that you already know the much you are ready to part with in forex trade, you must now establish how much of that should go to every trade you want to undertake and determine how you will quantify it. This enables you to identify the exact spots for stop loss for every trade.
The two common techniques for quantifying your risk include fixed sum and fixed percentage.
Under the fixed sum technique, a trader establishes their utmost risk for every trade as a static monetary amount. It is a simple rule to abide by. For instance, you may stipulate that you are willing to risk $200 for every single trade you make, having deposited about $5000 into your trading account. Hence, should you choose to perform 10 trades on a daily basis, then it means you are willing to risk out $2000 per day.
However, this method is disadvantageous as it fails to consider variations in the trading balance, which can cause you to miss immense returns by risking too small. Moreover, should you experience consistent loss, with your risk amount fixed, you stand to lose more and cause your balance to drop really quickly.
The fixed percentage technique is common as the risk per trade that you set is a percentage of the amount you have deposited. This technique is advantageous as it results in a fluctuating risked amount based on the deposited amounts.
3. Establish Your Risk to Reward
Given that you have already established your risk quantity, you can then establish the much you intend to profit from every trade. Therefore, establish a ratio of risk to reward, which should be above the 1:1 ratio, so that you are guaranteed profits in scenarios of consecutive losses.
4. Respect Leverage
Leverage enables a forex trader to open larger positions that would be impossible with their capital. As a forex trader, you may decide to ask your forex broker for a leveraged position. If utilized properly, the leveraged position can help propel you as a successful trader. Just as the leveraged position can aid amplify profits, it can also amplify losses on all losing trades. Therefore, operate carefully when trading with leverage.
5. Withdraw Profit
If you have traded and made profits, you should withdraw and enjoy it or accomplish something meaningful or worthwhile with it. Avoid leaving the profits in the account as the likelihood of you trading and losing it all.
The above five foreign exchange money tips should guide you into becoming a successful forex trader. Always have limits as to what you are okay losing, quantify your risk, establish a risk-reward ratio greater than 1:1, respect leverage, and withdraw profits whenever you have won a trade.