How to Manage your money in Forex
Trading Forex successfully requires a lot of patience, proper education, quick adaptation towards market updates and a number of other qualities. Today we will tell you more about managing your trading capital when trading FX, as this is vital for long-term gains. What many people fail to realise is that you should not only plan on gaining profit from a single trade, work on your exit and entry points - but you should also base your strategy on achieving gains over a long period of time. This is where the ability to manage your finances and trade capital becomes vital.
The reason many traders lose money in Forex is because of their inexperience, which leads to the neglect of Forex management principles. Due to its volatility, the Forex market is inherently risky. Money management in Forex is therefore a non-negotiable success factor for both beginners and experienced traders alike. Below we will tell you more about money management for beginners, before moving onto describing money management for advanced traders. We will close the article by summarising the methodologies in a series of small tips.
Just starting out?
If you are just starting out, you will need to educate yourself. One attitude that will help is to approach Forex trading like you would any career, because that is what it is. It is advisable that you develop your trading skills using a demo account first. Trade this way for a period of time to understand the various trading strategies and how the market works. The earlier you learn and adopt Forex money management strategies, the better.
When you feel you've learnt enough to start trading live, invest an amount that will not adversely affect your livelihood if you were to lose it all. Having other investment options on the side is also advisable. As the old saying goes - don't put all of your eggs in one basket.
The principles of money management in Forex are quite easy to follow and have the potential to save you a lot of losses if you adhere to them properly. Let's take a look at some important tips in FX management for beginners.
Have a Forex trading plan
Have a Forex trading plan and stick to it in all situations. Your plan will include your money management strategies. A trading plan will help you to keep your emotions in check and also prevent you from over trading.
With a plan, your entry and exit strategies are clearly defined - and you know when to take your gains or cut your losses without becoming fearful or greedy. This brings discipline into your trading, which is essential for successful Forex capital management.
This is not directly related with money management. In fact, it has more to do with developing a disciplined approach towards trading.
Understand your risks
Recognise that there is a risk element in every trade and accept the fact that it is possible to lose money on any given trade.
Don't get carried away with your potential profits. Instead, be more conscious of the potential risks. Always weigh the risk in every trade before considering the rewards.
It is better to make many small profits than to make one big profit from a trade. Entering into the market with the mindset of a gambler is a sure-fire way to lose money.
Before you start trading, look at the size of your deposit. If you can handle losing such money, then trade it. Forex trading is risky and you should never commit more than you are willing to lose. You should also try to deposit an amount you are willing to commit to, as taking out the capital after a few unsuccessful trades can spoil your whole trading experience.
Use stop-loss orders
Using stop-losses for every trade position you initiate is a good money management tip. Stop-loss orders shield your investment from unexpected shifts in the market.
Since there is always the possibility of a loss, set your stop-loss order not to exceed more than 2% of your trading balance for any given trade.
Let's say you have a trading balance of $20,000. Your stop-loss should be about 40 pips for a trade, so that if the trade goes against you, all you lose at your stop-loss will be $80.
There are different types of stops in Forex. How you place your stop-loss will depend on your personality and experience. Common types of stops include: an equity stop, a volatility stop, a chart stop (technical analysis) and a margin stop.
Forex trading is all about achieving more profits than losses. However, no trader can claim that they have never experienced losses. What is important is to restrict your losses with a stop-loss order, and not to lose more than you predefined before opening the trade. If a trade isn't going your way, you should not wait for the trade to change direction to try and minimise the loss. This is very risky and you may end up losing your whole trading capital. Use a stop-loss and if it's triggered, be confident to face the loss, analyse what happened and continue trading.
Use leverage wisely
Your broker may give you some leverage on your account to enable you to trade for bigger profits. However, you need to be careful when using this facility. A leverage of 1:200 on a $400 account means you can place trade for up $80,000. On the other hand, applying leverage of 1:500 means you can trade up to $200,000. Your level of exposure to risk is higher with a higher leverage.
If you are a beginner, avoid high leverage. Use leverage only when you have a clear mindset about the potential loss. Thus, you will not suffer major losses in terms of your portfolio - and you can avoid being on the wrong side of the market.