Forex Money Management

Forex Money ManagementThere are a significant number of Forex traders who possess many of the elements necessary to speculate successfully in the foreign exchange currency market (Forex). They are quite adept at interpreting price chart data and determining when prices will continue or reverse a trend, remain in a sideways channel or break that channel with exuberance.

They also seem to exhibit a significant degree of the intuition that must be combined with technical skills in order to know when to trade in accordance with the signals the indicators are supplying or when it is appropriate to trade counter to those signals.

What many of these Forex traders lack, however, are the money management skills to keep their risk levels in check and book profits from their trades. Forex money management is not as sexy or fun as some of the other aspects of Forex trading. It is essential for the long-term profitability and survival of the trader. Here are a few basic money management tips that will help you at the trader to stay in the game and have something to show for it.

1. Decide That Part of Every Profitable Trade is Yours Permanently.
This idea does require a high degree of personal discipline. Many traders will make one or more significantly profitable trades and then begin to trade recklessly under the assumption that they are trading with “house money.” The reality of this situation is that as soon as you exit profitable trade, that money is yours, not the houses. Commit to taking some percentage of any and all profitable trades and removing them from trading forever. This is the only absolutely certain way to prevent returning those profits to the market.

2. Trade for Pips Not Money.

This surprisingly simple step has the profound effect of substantially elevating your objectivity when making trading decisions. If your trading platform displays the profit or loss of a trade as a currency amount, consider disabling this option.

3. Match the Size of Your Trades to Your Trading Account Equity.

This will give you a psychological edge that will prevent you feeling compelled to babysit every transaction and sweat over every pip that goes against you. A time-honored guideline is to keep any individual trade at or below two percent of the trading account, meaning that if a trade costs $100 to initiate, trading capital should be no lower than $5000. With a $5000 trading account, no more than $1000 should ever be at risk in one trading session.

To conclude, trading Forex boils down to a question of survival. Successful traders all possess one common trait: longevity. Permanently keeping profits, using the objectivity afforded by removing the money element from trading decisions, and trading at a comfortable risk level will supply that longevity, so that on those infrequent occasions when the Forex market does present you with the opportunity to remain on the right side of a pronounced trend, you can do so securely, knowing that along with the proper trading decisions, your money management skills have earned you the privilege of letting a huge winning trade accumulate maximum profits.

 

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