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.
Leverage is one of the advantages of the Forex market. It can help you to achieve more, but it can also work against you. Caution is recommended.
Advanced money management Forex tips
One of the most common problems amongst Forex traders is money management. It is most problematic with new traders, but it is also a problem for advanced Forex traders. With this in mind, we'll look at some more advanced tips. Always remember that successful Forex traders use these Forex money management approaches to become successful in their field of trading. It requires some discipline in the trading process - and the following of specific rules. Once you have mastered the aforementioned tips, you should begin to implement them into your money management strategy.
Pay more attention to stop-losses
A good money management strategy in Forex is based on survival. Always remember that survival is the highest priority - profit comes later. One of the important Forex money management techniques involves preventing high losses. This can be done by using the stop-loss process in the best and most efficient way. Always try to accumulate your profit. If you find you are are always losing with a stop-loss, analyse your stops and see how many of them were actually useful. It may be time to adjust your levels to see better trading results.
Calculate the risk involved in the trading process. If the chances of profit are lower in comparison to the profit to gain, stop trading. You may want to use a trader's calculator to measure the risks better.
Covering lost capital
During Forex trading money management, remember that the process of covering lost capital is difficult. For example, you lose $1,000 by investing $5,000. The percentage loss is 20%. So to cover that loss, you need to get a profit of 25% with the same amount. You also need to pay an attention to the spreads and commissions, as this is a potential expense for you. Make sure you can cover all expenses and that any costs incurred to you won't have too much of a negative impact on your life.
Using the concept of protective stops in Forex money management strategy is a good way to improve money management. Protective stops are stop-losses that result in profit. In other words, once you have opened a position and have a floating profit of $500 USD, set a stop-loss that would result in a floating profit above $100 USD (depending on the chart, of course). This way, even if the price changes drastically and you hit your stop-loss level, you will still get some profit.
Take less stress
Don't become stressed in the trading process. The best Forex trading money management strategies insist on traders avoiding stress, and instead being comfortable with the amount of capital invested.
Don't be greedy
Avoid the feeling of greed coming into the equation. Greed can lead you to make the wrong trading decisions. Trading is not about opening a winning trade every minute or so, it is about opening the right trades at the right time - and closing such trades prematurely if they proved to be wrong.
Always try to maintain discipline and follow these Forex money management strategies. This way you will be in the best position to improve your trading.