Forex money management is an important part of being a trader considering how volatile the market is. If a person allows himself to trade without a clear plan on handling his investment capital, there’s a good chance that he will find himself losing at the end of the day. That being said, following are some Forex money management tips coming from practiced traders themselves.
Practically everyone agrees that new traders should start with a small capital during Forex trading. In fact, the smallest account will be best since this lessens the risk of a huge loss. Since the trader is just learning the ropes, this kind of approach is highly essential.
Do Not Overtrade
This is one of the most common Forex money management tips given to traders. Overtrading basically means placing too many trades at once, increasing the risks of a loss even as it increases profit chances. In this case, it is usually best to play it safe by placing a 5% limit on market exposure. This should be enough to provide profit possibilities without exposing the trader to too much money risks.
Use Stops and Targets
Stops and targets are basically your loss and profit limits. Forex is incredibly volatile and currencies may go up in value one minute and sink down the next. By establishing stops and targets, traders are able to put limits on how much losses they can get before finally letting go of the trade. The same goes for the profit. This is actually a good strategy to ensure that you wouldn’t lose too much or be able to obtain profit quickly before the tables turn.
Do Not Overlarge
Possibly one of the biggest attractions of Forex trading is the ability to control a large amount of money with little capital. This is called leveraging and can be very useful for a new trader with little capital. Note however that when handled incorrectly, leveraging can actually be a burden. Ideally, you should only entertain a ratio of 1:100 leverage for your Forex account to minimize any risks during trade.
Trade at Your Best
New traders are advised to jump in the market when they are at their best frame of mind. Remember that there are many factors affecting Forex movement which means you need to be in a sound position to cover them all before making a logical decision. Try trading in Forex during your most active time when your mind is at its sharpest.
Risk to Reward Ratio
Never enter a trade where the risk to reward ratio is less than 1:2. This means that the profit amount you are targeting is twice your stop loss limit. This kind of system lessens the risk since for every profit, you will be making two more trades to cancel the earnings.
Of course, those aren’t the only Forex money management tips and tricks that traders use to maximize their profit and minimize loss. New traders are advised to use the tips above and then simply develop new techniques as they grow more familiar about the Foreign Exchange market.