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Lesson 3: The Best Money Management Tips for Forex

Lesson 3: The Best
Money Management Tips for Forex

1. Quantify the Risk Capital

Calculate
the risks involved in the trading process. If the odds of profit are less than
the money to be gained, stop trading. You might want to use a trading
calculator to calculate risks more effectively. Many of the important aspects
of money management are extracted from this primary concept.

For
example, the size of your overall risk capital will be a factor that determines
the upper limit of your role size. You may find it prudent to lose no more than
2% of your total risk capital in any particular transaction. In addition, you
can always incorporate risk management in your approach to ensure that you
handle risks effectively.

2. Stop Trading Too Aggressively

Trading too
aggressively is perhaps the biggest mistake new traders make. If a small
sequence of losses is enough to eliminate most of your risk capital, this
indicates that there is too much risk to each trade. A good way to strive for
the correct level of risk is to change the size of your position to match the
value of the pair you are trading. Yet note that a more volatile currency needs
a smaller position compared to a fewer volatile pair.

3. Be Realistic

One of the
reasons that new traders are overly aggressive is that their aspirations are
not reasonable. We may feel that aggressive trading would help them make a
quicker return on their investment. Nonetheless, the best traders are making
steady returns. Setting realistic targets and maintaining a conservative
approach is the best way to start trading.

4. Admit When You Are Wrong

The golden
rule of trading is to run your gains and reduce your losses. It’s important to
leave quickly when there’s clear evidence that you’ve made a bad deal. It’s a
natural human tendency to try and turn a bad situation into a better one, but
it’s a mistake in FX trading.

Here’s why
you can’t control the market.

5. Prepare for the worst (Past
Performance is not indicative of future outcomes)

We cannot
know the future of the market, but we have a lot of evidence from the past.
Everything happened before may not be replicated, but it does demonstrate what
is possible. Therefore, it’s important to look at the history of the currency
pair you’re trading. Talk about what steps you’d need to take to protect
yourself if a bad scenario happens again.

Don’t
underestimate the likelihood that price spikes will happen–you should have a
strategy for such a situation. You don’t have to reach far into the past to
find examples of cost shocks. During January 2015, for instance, the Swiss
Franc rose by about 30% against the Euro in a matter of minutes.

6. Envisage Exit
Points Before Entering a Position

Think
about what level you’re striving for on the upside, and what degree of failure
it’s prudent to tolerate on the downside. Doing so will help you maintain your
discipline in the heat of your trading. It will also encourage you to think
about risk versus reward.

7. Use Stop-Losses

Using
Stop-Loss is a good money management tool for every trading position you start.
Stop-loss orders secure your portfolio from unforeseen market changes. As there
is always the risk of a loss, set your stop-loss order not to exceed more than
2% of your trading balance for any given transaction. Let’s say you’ve got a
trade balance of $20,000. Your stop-loss should be about 40 pipes for a deal,
so that if the trade goes against you, what you lose at your stop-loss is $80.

In Forex,
there are different types of stops. Whether your stop-loss is going to rely on
your temperament and experience. Common types of stops include: Equity stop,
Volatility stop, Chart stop (technical analysis), and Margin stop. Good money
management strategy for Forex is focused on survival. Just note that life is
the top priority-and that profit comes later. One of the essential strategies
of Forex money management includes the avoidance of large losses. This can be
done through the best and most efficient use of the stop-loss method. Also try
to build up your profits. When you find that you’re always losing with a
stop-loss, evaluate your stops and see how many of them are actually useful.

It might
just be time to adjust your rates in order to get better trading returns.
Stop-loss helps traders minimize losses and is particularly useful when you are
unable to track the market. At the very least, if you don’t want to use an
actual order on the market, you should use a mental pause. Price warnings are
useful, too. You can also set up SMS or email alerts using the MetaTrader 4
Supreme Edition plugin.

8. Don’t Trade on Tilt

At some
point, you may have a bad loss or a burn through a substantial portion of your
risk capital. After a big loss, there’s a desire to try and get your investment
back with the next deal. But this is a question. Increasing your risk after
your financial capital has been drained is the worst time to do so.
Alternatively, consider reducing your trading volume in a losing streak, or
take a break until you can find a highly likely deal. Also remain on an even
keel, both emotionally and in terms of the size of your place.

9. Respect and Understand Leverage

Leverage offers
the opportunity to increase the profits made from the risk capital available to
you, but it also raises the risk potential. It’s a useful tool, but it’s very
important to understand the extent of your overall exposure. Your broker can
give you some leverage on your account to allow you to trade for higher
profits. But, when using this facility, you need to be alert. For example, a
1:200 leverage on a $400 account means you can sell for up to $80,000. On the
other hand, adding a leverage ratio of 1:500 means that you can trade up to
$200,000.

As a
result, the risk exposure level is higher with higher leverage. If you’re a
novice, avoid high leverage. Try using leverage only if you have a clear
understanding of potential losses. Therefore, you will not suffer major losses
on your portfolio, and you can stop being on the wrong side of the market.
Lifting is one of the strengths of the Forex market. It can help you achieve
more, but it can also work against you. Caution is recommended here.

Admiral
markets offer different leverages depending on the position of the dealer.
Traders fall into two categories: merchants and professional traders. Admiral
Markets provides a leverage of 1:30 for retail traders and a leverage of 1:500
for professional traders. There are advantages and tradeoffs for both, and you
can find out what’s open to you on our retail and professional terms.

10. Think Long-Term

The explanation
is that the success or failure of the trading system will be decided by its
long-term results. So be careful of adding too much importance to the success
or failure of your current trade. Do not bend or ignore the rules of your
system to make your current business work.

Advanced Money Management Forex
Tips

One of the
most common problems for Forex traders is money management. It’s most
troublesome for new traders, but it’s also a problem for experienced Forex
traders. With this in mind, let’s take a look at some more technical ideas.
Also note that successful traders are using these Forex money management
strategies to make their trading business more profitable. There is a need for
some consistency in the trading process-and to obey specific rules.

Once you
have learned the basic tips, you should start implementing them in your money
management strategy.

Have a Forex Trading Strategy

Have a
Forex Trading Plan and stick with it in all cases. Your budget will include
your money management strategy. A trading plan will help you keep your emotions
under control and will also stop you from trading. With a strategy, your entry
and exit points are clearly defined, and you know when to take your profits or
and your losses without becoming afraid or greedy. It adds discipline to your
trading, which is necessary for good Forex capital management.

This is
not directly related to money management. In fact, it has more to do with the
development of a disciplined approach to trading.

Covering Lost Capital

During
Forex money management trade, note that it is difficult to cover lost capital.
For example, by spending $5,000, you lose $1,000. The rate of loss is 20%. And,
to cover the loss, you need to make a profit of 25% of the same amount. You
also need to pay attention to the spreads and fees offered, as this is a
possible cost for you. Make sure you’re able to cover all of your expenses and
any costs incurred so that they don’t have a negative impact on your life.

Protective Stops

In addition
to what was addressed earlier on avoiding losses, the use of the idea of
defensive stops in the Forex money management technique is also a good way to
improve money management.

Protective
stops are stop-losses that give rise to revenue. In other words, once you have
opened a position and have a floating gain of $500 USD, set a stop-loss that
would result in a floating profit of more than $100 USD (depending on the map,
of course). That way, even if the price changes dramatically and you hit the
stop-loss stage, you’re still going to make some money.

Take Less Stress

Don’t get
stressed out in the trading process. Best Forex trading money management
approaches recommend that traders reduce pressure and instead be comfortable
with the amount of capital invested.

Don’t Be Greedy

Remove the
feeling of greed that falls into the equation. Greed can lead you to take poor
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 those
trades prematurely if it proves to be correct. Please try to maintain
consistency and follow the money management strategies of Forex. You will be in
the best position to improve your trading.

Conclusion

As with
all aspects of trading, what works best can vary depending on the individual’s
choice. Many traders are willing to accept more threat than others. But if you’re
a novice trader, no matter who you are, a robust tip is to start
conservatively. We suggest the implementation of new approaches, in a risk-free
environment, with a free Demo trading account.

A demo
account is the perfect place for a novice to get acquainted with trading, or
for experienced traders to practice. Whatever the aim may be, a demo account is
a must for a modern trader.