Forex Money Management Tips; Money Management Tips For Trading On The Forex Market

Forex Money Management Tips; Money Management Tips For Trading On The ForexThere are many different elements involved in successfully trading currencies on the foreign exchange currency market (FOREX).

  • Analytical skills, both technical and fundamental, are fairly simple and straightforward. For example, even the trader with mere hours of experience can learn to recognize support and resistance.
  • Learning to interpret the signals provided by various indicators takes more skill, but again, even relatively inexperienced traders quickly pick up the skills required to forecast prices based on the signals provided by charting software.
  • Money management is also an important area in which to gain expertise. It is not as interesting or exciting as some of the other trading skills, but failing to employ commonsense money management techniques is a rapid path to Forex bankruptcy.

Here are a couple time-tested tips for money management that can help traders survive to prosper in the long run.

Money Management in the Forex Market

Let Your Winners Run/Cut Your Losers Short

Those seven words have been repeated ad nauseam. They are so easy to say, yet they represent what is perhaps the biggest challenge any Forex trader will ever face.

People who consider trading Forex are by nature competitive. Competitive people hate to lose, yet losing is a part of Forex trading that not even the most successful trader who ever lived has not experienced. The desire to win is deeply embedded in the psyche of most human beings from an early age, by parents and other authority figures, with sports and academic competition being the main sources.

To gain the skill of closing losing trades while losses are still small does not come naturally. It is made even more difficult because traders’ brains seem to be programmed to easily recall trades that started off in negative territory, and then recovered to become positive.

The best way to acquire the ability to give up on a losing trade is to determine the maximum acceptable loss before the trade is executed.

Likewise, allowing a trade that is profitable to continue is equally challenging. The experience that seems to dominate traders’ perceptions here is that of seeing a positive trade returning to the entry point, erasing profits or even becoming a losing trade.

Again, pre-determining a profit objective prior to initiating the trade and using a trailing stop to lock in profits is necessary to develop the ability to let winning trades continue. Otherwise, the temptation to jump on a small winning trade will be too strong. Traders who suffer from this shortcoming often have impressive winning percentages, but no substantial gain in trading equity.

Pre-Determine Maximum Percentage of Equity to Risk

Another key money-management tip is to limit the amount of trading capital at risk in order that even if the worst-case scenario is realized, there will be enough capital preserved to permit future trading.

A basic guideline in this regard is to never risk more than 20% of available trading capital during any one trading session, and no more than 2% of the available trading capital on any one currency pair transaction.

The objectivity and personal discipline required to develop these two primary money management techniques is critical to survival for a Forex trader. Trading with simulated accounts is an excellent way to practice acquiring these valuable skills.

For more money management tips for trading Forex, or to set up a free Forex trading demo account, or contact LucrorFX today.

 

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