Money Management

Understanding basic money management principles and risk-limiting techniques when trading can really make a difference in the profitability of an investor or trader.

To remain successful, 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.

Good money management boosts your income and keeps you in the trading business over the long haul. Trading for Beginners – Read on for some essential money management tips you can implement when trading.

Education

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 trader. Training courses help you develop the skills you need to succeed in the market.

To consistently profit from trading, it’s crucial to master the art of professionally managing your trading account. Dedicate time to thoroughly researching money management strategies and commit to incorporating sound money management principles into your trading plan before risking real money.

The more you learn about fundamental and technical analysis of currencies, the better prepared you’ll be when executing trades. Keeping a keen eye on relevant news also helps traders deal with the geopolitical and economic forces that continuously interact to impact the market.

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 trader, you should also be aware of what moves any market 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 also make a significant difference in your profitability.

Ideally, you’ll want a trading platform that’s got the functionality you need and is easy to use immediately. Many brokers support the popular trading platforms, which are available free and have an extensive user community.

Most day traders prefer trading the most volatile pairs, while investors focus on the most smoothly trading pairs.

Start Small

Starting out trading in small positions and then keeping your trade size appropriate relative to the amount of money in your 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 our account at any one time to help safeguard your remaining funds.

Successful traders often limit their risk exposure to a maximum of 20% of their trading account at any given time or limit it to a maximum of 3% per diversified investment position.

Some traders also employ a dynamic position sizing approach, adjusting their trade size based on the perceived probability of success. They may take smaller positions for lower-probability trades and larger positions for higher-probability trades.

Lastly, it’s essential to remember that any form of trading and investing should only involve risk capital, not the capital you need to cover your running costs.

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.

Protect Your Money With Stops and Profit Targets

Safeguarding your trading capital from losses and knowing when to secure accumulated profits are critical aspects of successful trading. Incorporating stop loss and take profit orders into your trading strategy is a crucial component of money management.

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 also employ trailing stop loss orders, which automatically adjust in a favorable direction as the initial position becomes more profitable. This type of order helps traders protect their gains and prevent a profitable trade from turning into a loss if the market experiences a significant reversal.

When it comes to taking profits, make sure you allow them to run, but avoid getting too greedy. You might, therefore, create a take-profit order for each trade around the target level you have in mind when you initiate the position. Even if the underlying end 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.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.