5 Forex Money Management Tips that Can Boost Your Income
Understanding basic money management principles and sound risk limiting techniques when trading forex can really make the difference between a consistently profitable trader and one whose broker liquidates their trading positions when their losses exceed margin requirements.
To remain successful as a forex trader, you really want your profits to be substantial and your losses minimal. You also need to know when to take profits and how to remain emotionally prepared to accept losses and bounce back from them so you can regain the confidence to keep trading.
Any forex trader who does not pay attention to money management is gambling instead of trading. Incorporating sound money management principles in your trading plan generally helps boost your income and keep you in the forex trading business over the long haul. What is forex trading and how does it work? Read on for some key money management tips you can implement when trading forex.
Knowledge is power, and while education is not exactly part of money management, learning about what money management involves should be an early step you take to help boost your future income as a forex trader.
To make money consistently when trading forex, you will need to understand how to manage the funds in your trading account more professionally. Take some time to thoroughly research the topic of money management and resolve upfront to put sound money management principles into your trading plan before you start using real money to trade with.
Trading forex involves knowledge of the foreign exchange market, which means that the more you learn about the fundamental and technical aspects of analyzing currencies, the more prepared you’ll be when trading positions. Keeping a keen eye on relevant news also helps traders deal with the geopolitical and economic forces that continuously interact to impact the forex market.
2. Analyze Before Trading
You will also generally want to incorporate a form of market analysis into your trade plan that will help make your trading decisions more objective. You can base such decisions on fundamental analysis, technical analysis or both.
As a forex trader, you should also know what moves any currency pairs you intend to trade. You will also typically want to start off by operating in the most prominent and liquid currency pairs to minimize order slippage and avoid excessive transaction costs due to wider dealing spreads.
Furthermore, selecting a competent broker with tight dealing spreads and little or no slippage on stop loss orders could save you considerable money if you’re an active trader. Choosing a good broker, you’ll feel comfortable with can be done by checking them out through their demo or practice accounts.
Demo account trading will give you a good idea of the broker’s dealer spreads and how they behave in a fast market without committing your funds. The sophistication and ergonomics of a broker’s trading platform can also make a significant difference to your profitability.
Ideally, you’ll want a trading platform that’s got the functionality you need and is easy to use immediately. Many forex brokers support the popular MetaTrader4 and 5 trading platform available free from MetaQuotes with an extensive user community.
Most day traders prefer trading the most volatile forex pairs, while investors focus on the most smoothly trading forex pairs.
3. Start Small
Starting out trading in small positions and then keeping your trade size appropriate relative to the amount of money in your forex account will help you avoid drawing down more than you feel comfortable with on any particular trade. For example, you might want to risk only a certain percentage of your account at any one time to help safeguard your remaining funds.
Many successful forex traders only risk 20% of their account at any particular time. Even if that amount is entirely lost, the trader can still recover that loss relatively quickly using the funds remaining in the account. Some traders might also adjust their position size based on their estimate of how likely a trade is to become profitable, taking lower probability trades in smaller amounts and higher probability trades in higher amounts.
Furthermore, remember to use only risk capital when trading, which consists of funds that can safely be lost completely. Risking funds that you need for basic necessities could cause you to undergo excessive emotional stress when faced with a losing trade. Operating under such stress can affect your judgment severely and impede you from making sensible and objective trading decisions.
4. Protect Your Money With Stops and Profit Targets
Protecting the capital in your trading account from losses and knowing when to take any accumulated profits is essential as a forex trader. Trading with stop loss and take profit orders, therefore, comprises an important part of forex money management that can both make and save you money in the long run.
Before initiating a position in a currency pair, it first makes sense to determine at which point your position should be liquidated just in case it turns out to be a loser. You can then place a stop loss order with your broker to close out the trade automatically at that level once the trade has been entered into.
Some traders might also use a trailing stop loss order that moves in a favorable direction as the initial position becomes more profitable. This type of order helps the trader avoid turning a profitable trade into a loser in case the market reverses substantially.
When it comes to taking profits, make sure you allow them to run, but avoid getting too greedy. You might therefore enter a take profit order for each trade around the target level you have in mind when you initiate the position. Even if the underlying trend you were following persists, corrections are common, so taking profits can allow you to get back into the market later at a better level once a pullback occurs.
5. Learn and Adjust
An important part of learning how to do anything well involves keeping track of your mistakes and using them as an educational opportunity. In an analogous way, once you identify an issue with your trading activity that has been causing suboptimal results, you can then adjust your future trading behavior in order to avoid that issue whenever possible.
One helpful tool you can use in the process is a trading journal where you record the details and outcome of each trade along with your reasoning for taking it and your analysis of the results. After a period of trading, you can review your journal to help you with this learning process and make necessary improvements to refine your strategies.
The best forex indicators can be used to determine an optimized entry point alongside with fundamental analysis.
Get the Best Forex Money Management Tips on Your Side
Forex trading can offer a decent long term business opportunity for a good money manager. Without the use of sound money management techniques, however, trading forex can instead completely consume your risk capital, as many unprepared novice traders have quickly discovered.
Furthermore, keeping realistic boundaries on profits and losses by the use of the established money management principles outlined above lets you remain relatively impartial as a trader. You can therefore avoid sabotaging your currency trading activities due to excessive emotional reactions, which presents one less obstacle you have to overcome on your way to becoming a successful forex trader.