Forex Money Management: An Introduction to Basic Styles
Foreign exchange trading is all about trading and investing currencies. Forex traders derive their profits from the very small changes or difference that result from the interaction of market forces. Given that the nature of these market forces and value of currencies are bound to change and the odds are not always in your favor, there is a need for the exercise of discipline. In order to be safe from the harsh tides, there is a need to practice forex money management to veer away from all the unwanted losses. But there are different styles that you can choose from. For beginners, it is suggested to use only the basic styles because these are easier to understand and apply.
Forex money management is important for several reasons. There are different aspects that you should fully understand so that you can do the proper foreign exchange money management techniques.
First, you should understand how important it is to learn how to plan properly. A keen sense of foresight will increase your chance of surviving the volatile and unforgiving forex tides. For example, if you have an account that has 25 percent loss, you should be aware that you need to earn at least 75 percent in order to get your capital back. Many expert traders are aware of this but they tend to ignore this upon spotting “the big one” or an opportunity to earn big and fast. But this is wrong because this is like risking your entire profits to a possible big trade.
The second principle you should understand when it comes to forex money management is the fact that it’s fine to trade in small increments. It is better to be safe than to be sorry. According to experts, trading for beginners should be limited at 1 percent of the total capital. This way, a newbie trader can stay within the safe zone, make mistakes, and stay in the world of trading. This way, the trader can practice and get the feel of it and learn that investing is not a one-time big time thing.
Preferred forex money management may differ from one trader to another due to the fact that the trading style depends highly on the style of the trader. There are two ways of management that you can employ: (1) using small stop increments and accumulate profits from trades you have won and (2) taking small increments of profits with large stop increments anticipating that accumulating small amounts of profits is indeed a better scenario than having large amount of losses. Many traders who have been in the field for a long time use these strategies interchangeably depending on how they see the situation. If you are serious about trading, you will be considering another aspect of forex money management.
This aspect is about the different types of stops:
- Equity stop. Considered as the simples kind of stop which suggests that a trader should risk around 1 or 2 percent of his capital.
- Chart stop. This stop is generated from several different charts and borne out of a much deeper technical analysis of the various market stimuli.
- Margin stop. This is considered to be an unconventional method of forex money management but it shows a lot of promise I you are able to use it properly.
- Volatility stop. This does not take into consideration the different price actions. What’s being considered is the volatility of the changes of price.
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