Forex money management is an essential topic that should be discussed to aspiring traders. However, this same topic is oftentimes overlooked by novice and expert traders alike. Many traders are giving too much focus on trading strategies. Almost every adviser considers forex trading strategies as the starting point of the discussion without even touching its important prerequisite – money management. You might be asking at this point why this aspect of foreign exchange trading is so important.
For one, if you truly want to earn a lot from Forex trading, you should make profit consistently and regularly over a long period of time. This can only be possible if you have enough knowledge on forex money management. This marks the distinction between a regular trader and a successful trader. The one who knows about money management tends to earn more because they lose less. The forex money managers have more confidence because they only commit to calculated risks.
But there are basic rules that you have to learn if you want to master forex money management. Among these rules are the following:
Make sure that you are opening your account with a reasonable balance. To tell you the truth, it is impossible to get into decent deals with a balance of $300 dollars, unless you are willing to risk your 100 percent. But are you not surprised to find market makers approve of this? Wonder no more – it is due to the fact that there is a 100 percent certainty that the cash in your account will go to their hands.
Avoid over-leveraging when using your account. The great advantage is indeed in the process of leveraging or being able to enter a deal with a small capital. As a rule of thumb, you should not go beyond 1:100. Just remember the basic forex money management principle that leveraging in foreign exchange is comparable to a two-edged sword. According to statistics, for most of the time, leveraging works against the traders.
Moderate trading. Do not overtrade. Avoid making too many deals or trades within a short period of time. Increasing the number of tries also increases the chances of failure. As much as possible, you should keep the number of tries to a minimum while making the most of each by committing to calculated risk.
Use acceptable or calculated risk. Trades are meant to tempt you to give in. The juicier it gets, the riskier it actually is. Take it from the experts who believe that 5 percent exposure should be the maximum risk that any account should take within a certain period of time. Beyond 5 percent, you might be positioning yourself in a situation that you will regret in the long run.
Use targets and stops while trading. This is one of the basic forex money management rules that you should not forget. Not putting a profit target or a stop loss is like trading without a definite direction. This can mean the end for you and your account. If you intend to proceed with trading, then proceed, by all means with caution.
Forex money management is one of the essential factors that you should not dare forget while trading. You should learn about this alongside with a sound strategy. These will go well together in your quest towards better profitability in forex.
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