As practice shows that tens of thousands of traders finish their careers in the first weeks or even days, simply because they ignore money management rules. Some of them simply do not understand what it is and why it is so necessary. Others simply prefer not to use it because of "big stakes - big money". It is not acceptable to think that this big money can not only be earned, but also lost.
All professional traders agree that there can be no success without complying with the money management rules. If you want to become a specialist in your business with a stable high income, put them first. After all, this is the easiest Forex trading science that you can learn.
The Best Forex Money Management Tips
Experienced traders all agree that if you follow these simple rules, you will have to try very hard to wipe your account out because it is almost impossible.
Check out these top best money management tips for forex traders.
- Amount per Each Trade
The amount of money invested in one transaction cannot exceed 10% or even 5% of the total trading capital. In this case, the deposit does not mean the money that you invested at the initial stage, but the money that is actually on the account balance at the moment. For example, if you have already closed several profitable trades, then you count the total amount of funds, which will be more than before you`ve closed them. If you have lost some, then it will be less. How can you determine how much money you're investing in a trade? By the volume of the position, which is the size of the lot. This is the value you choose when placing an order. The whole lot is usually 1000-1500 dollars, depending on the currency pair.
Pay attention that ascertaining the risk per trade is a crucial instrument if you go through a losing streak, so then you can better shield your trading funds, and evade large drawdowns in your trading account.
- Always Set the Stop Loss
Setting a Stop Loss for each trade has almost no drawbacks, only advantages. Very often traders are emotionally attached to their trades, which can become fatal. For example, if a position becomes unprofitable, the emotionally involved trader will not want to close it and will believe that the price can still turn around and go in the right direction. Setting the Stop Loss helps to solve this problem. With that, you can strictly control the reward/risk ratio. You should always follow this rule so that your money management would give you tangible benefits and the deposit would not fade.
Note that Stop Loss should not exceed 2% of the deposit size. Again, as in the previous paragraph, we take into account only real money on the account. Even if the total amount shows, for example, 1000 dollars, but at present, there is an unprofitable transaction and it is already minus 100 dollars, it means that the capital is 900 dollars. We calculate 2% = $18. It means that your loss in case of a bad position should not exceed $18. It's better to calculate Stop Loss before you open a position. Look and estimate where do you think it should be? If you lose more than 2% at this level, then such a position should be classified as high-risk and disregarded.
- Only Invest the Capital You Can Afford to Lose
It might sound obvious but still, deposit only those funds that you can afford to lose. Countless traders, especially newcomers, skip this rule because they believe that it “won’t happen to them”.
If trading were like gambling at a casino, you wouldn`t take all the cash you have to the casino to bet on black, right? Well, it`s the same with trading – don`t take needless risks by using the money you need to live.
Because it’s potential to lose all your trading funds, and because trading with funds you live on will add extra tension and emotional stress to your trading, jeopardizing your decision-making abilities and raising the chances of making mistakes.
The Foreign Exchange market is highly volatile and changeable, so it’s better to trade “conservative amounts” from your disposable earnings.
The profit and loss ratio must be considered. Some approaches imply that you will set equal Stop Loss and Take Profit. This is a wrong assumption. Likely gain should be at least 3 times higher than possible loss. If you stick to this rule always, even three following bad trades will overlay with one good one. Do you feel how solid this is? Losing a deposit in this scenario becomes difficult even if you have a bad strategy. In this case, the perfect option is considered not 3/1, but 5/1. Strive for it in the process of your work.
- Cut Your Losses Short and Let Your Profits Run On
A large number of former forex traders have managed to wipe out their trading accounts because they did not have the discipline to take what would initially have been a small loss quickly.
Keeping losses small makes up one of the most important money management rules in a trading approach, and most prosperous forex traders learn to engage this concept strictly in their trading activities.
Bear in mind that you will make an unlikely candidate for a successful forex trader if you do not allow your winning trades to run their course and gain you the big money that the forex market sometimes offers.
The key to doing this is to remember that once you have a winning trade, you then need to cultivate the patience to allow for the position to grow into a sizable gain, without giving in to the temptation to rush in to take your profits too quickly.
According to this money management advice, you should close those trades that cause losses in time, according to your trading system and take the maximum benefit from profitable deals.
- Understand and Control Your Leverage
In the Forex market, many brokers allow their clients to use leverage. It can be useful, but its use can also lead to huge losses.
When using leverage, your profits can be increased promptly, but remember that the same implements to your losses. This is why you need to understand how leverage and margin trading work, as well as how they influence your overall performance and trading.
Forex traders are often tempted to use high leverage to make significant profits, but if you’re over-leveraged one quick change in the market could easily wipe you out.
If you rationally choose the volume of your positions and do not use too much leverage, your account is safe.
No matter what anybody else says but money management is one of the key elements of successful trading. You can use the best trading strategy ever created, have an excellent trading plan, be disciplined, but if you do not follow these rules, you will not succeed, despite all your efforts. So, read carefully these rules again, think them over and start using when you open any of the trades.
We hope you find this article helpful and wish you successful trades!