Like dieting and working out, in the forex trading market, effective money management is something that most traders preach but few practise day-to-day. Why is this? Well, just like picking yourself up from the sofa on a hot summer’s day and taking yourself to the gym, effectively managing your money in forex can often feel tiresome and be considered a burden
In this blog post, therefore, we’re discussing how money management can be effectively integrated into forex trading strategies to aid long-term trading success – ensuring you know how best to utilise it to help avoid any potential money losses.
What is it?
By far one of the best forex strategies, managing your money effectively should be the first thing both novice traders and forex veterans concern themselves with when entering the market. Simply put, money management in the forex industry refers to a variety of rules that help to minimise potential losses, maximise profits and expand trading profiles. While this may sound simple enough, in most cases, it’s those new to the trading world who disregard this basic set of rules and, as a result, end up blowing their accounts.
As such, no matter how confident you are in your forex strategy, the potential of you becoming a long-term, successful trader will remain pretty poor unless you’ve grasped reward-to-risk ratios, risk per trade or you don’t efficiently use stop-loss orders.
Why is it important?
It’s no secret that forex trading is incredibly risky due to the volatility of the market. As a result (and to protect your finances), whether you’re a forex beginner or skilled professional, you should consider money management strategies a ‘must’ instead of a ‘maybe’. After all, if you don’t look after your finances and consider money management you simply won’t become a profitable forex trader.
Let’s look at the following scenario as an example…
There are two traders – one has an outstanding forex strategy and is profitable in 97% of cases, but he doesn’t manage his risk. On the other hand, the second trader has a forex strategy with only an average of 60% win rate, however, she utilises and closely adheres to money management rules. As such, who do you think finishes the month having made the most profits? The answer is the second trader. Why? Because the first trader, despite his profitability rating, is far more likely to lose his entire sum of profits on a single losing trade.
Failing to understand that forex trading isn’t only about gaining profit from a single trade – and creating a strategy that isn’t built to achieve gains over a longer period of time – is where most traders go wrong. As a result, the ability to trade capital and finances is vital.
How can I incorporate it into my forex strategy?
- Make sure you understand leverage – While leverage is understood to magnify any profits made through the available risk capital, it’s important for forex traders to understand that the higher the leverage, the bigger the possibility of loss per trade. As such, only use leverage when you’re certain that you have a clear understanding of potential losses
- Try to avoid trading too aggressively – Ultimately the downfall of many forex trading beginners who fail to consider whether or not a number of small losses could eradicate most of their risk capital. Trading too aggressively means that many traders don’t consider how much risk each small trade has attached to it. As such, ensuring you have a documented and strict trading plan that contains money management tips that help you to manage risk will help you to avoid emotional, aggressive trading
- Ensure you’re planning for the long-term – Generally speaking, a trade’s failure or success is determined by its long-term performance. As a result, remain wary of risking potential future success by placing too much pressure on the importance of a current trade’s success or failure. Additionally, keep up-to-date with current affairs and other news developments – economic and social – by referring to a forex calendar to help inform your future strategy
- Work stop-losses into your strategy – Stop-losses will ensure you don’t lose a large amount of money on one trade, therefore shielding your investment from unexpected shifts in the financial market. As the potential of a loss will always exist, we suggest setting up your stop-loss order so that it never exceeds more than 2% of your trading balance for any trade
Managing your money in forex can be as flexible as the market itself. However, it’s important to remember that so long as traders incorporate some form of this into their strategy, they’ll be able to see potential profit and, as such, be deemed a successful forex trader. Want to discover more professional advice along with useful tips on how to prepare yourself for your trading journey? Sign up to one of our free seminars, where you’ll learn forex strategies that will put you in good stead for your trading career.