Money Management in Forex Trading: A Guide for Traders

Forex money management sums up the concept of effectively managing the financial risks to which your forex trading account is exposed so as to conserve your trading capital. It comprises certain techniques for making your risk capital yield high returns on any losses you may incur during the process. 

Money management in trading can be a challenging task. However, without a sound money management strategy, trading currencies or any asset class would be highly risky. So, it’s a “challenge” worth pursuing for every trader. 

Importance of money management for traders

You must be familiar with the fact that managing risk is one of the primary jobs of a trader. As human beings, most of us want better financial returns in general, which is why forex fund management is just as important as risk management is for traders. 

In order to trade successfully in the forex markets, you need a solid forex money management plan to handle your profits and losses wisely. Ideally, such a strategy, contained in an overall trading plan, should lay out the exact techniques you intend to use for properly governing your finances.

7 Tips for Better Forex Money Management

Before you decide to stick to a particular technique of money management in forex trading, try testing different methods to see which ones work best for your risk tolerance levels and your trading strategy. 

Once you stumble upon the best technique yet, make sure to muster the discipline required for sticking to that technique. 

As a first step towards incorporating the best practices for money management, here are seven well-known trading money management steps:

1. Use stop-loss orders

Stop-loss orders let you determine the risk value, along with preserving your capital. You must determine a stop-loss order every time a position is initiated so that you know what the value of capital risk is. 

If you adhere to, say, a 2% risk ratio, it is imperative that you respect this value by putting the stop-loss order in place. For instance, a $15,000 account with a 2% risk profile on any given trade amounts to $300. 

Remember though that there are also spread costs and commissions to be taken into consideration. 

Even if you lose a small percentage of your account, it shouldn’t stop you from trading the markets another day. If you try to ride out your losses merely in the hope that the markets will turn in your favor sometime in the future, you’re taking a bigger risk. 

In the case of an unusually high loss rate, it’s advisable to adjust your stop position according to current price volatility. 

Chart stop, margin stop, volatility stop, and equity stop are some common types of stop-loss orders.

2. Select a suitable position size

To figure out the amount to be traded according to your account size, you need to put down a set of strict guidelines. This will prevent unforeseen trading losses from affecting the funds in your account. 

You may determine the size of your position by considering the expected risk-reward ratio on a trade. In that case, if you expect a greater reward for a particular risk on a trade, you may want to take these sorts of trades in larger amounts. 

However, some traders may focus more on preserving their capital by settling their trade amounts as a percentage corresponding to the amount of funds left in their trading account. Yet others may trade in a fixed number of lots. 

These and more position-sizing tactics can help you manage your money effectively while trading in the forex market.

3. Work out the risk-reward ratio

One of the most vital components of money management strategies for futures traders is measuring the risk-reward ratio. The risk-reward ratio helps you calculate how much potential reward you can get for every dollar you put in the market. 

For example, a risk-reward profile of 1:4 would mean that to potentially earn $4, you are risking $1. 

Many traders and investors acknowledge that it’s worth taking trades offering a minimum risk-reward ratio of 1:2 since it allows them to gain profits and recover losses. 

So, instead of focusing on your win ratio, put your sights on the risk-reward balance.

4. Don’t use all your capital at any one time

Instead of putting all your trading capital in the market at once, keeping a huge portion of the funds in your trading account in reserve is a smarter move since it will help you to recover faster from losses, including significant ones. 

For example, if you put 80% of your trading capital at risk at any one time across all open positions and you suffer a full 80% loss on the funds you’ve placed at stake, you will have only 20% of funds remaining in your trading account. 

On the other hand, putting 10% of your account at risk will leave you with a whopping 90% of funds in your account, even in the face of a full 10% drawdown.

5. Set realistic goals

Harboring unrealistic expectations may make you aggressive at trading, which in turn may result in you making critical mistakes. 

Established and experienced traders have enough discipline to think long-term, which helps them abide by their money management strategies. This is why, with a good forex money management plan in place, even two or four consecutive losses cannot impact their trading ability. 

While it’s true that trading offers immense opportunities, it might take longer than expected to reach a certain level of consistency. 

Hence, the right way to begin your trading journey is by setting reasonable goals.

6. Find your trading style and stick to it

The types of instruments you trade, as well as your forex money management strategy, make up your forex trading style. 

You need to find your own trading and money management style that you’re comfortable with. Once you’re able to identify one, optimally capitalise on it to drive greater value.

7. Take regular breaks

In order to make smart decisions, especially during critical moments, it’s important to boost your stamina by taking breaks from your trading screen from time to time. 

This will help you replenish your mental energy and stay fresh so that you can keep trading with the right mindset and approach.

Want to learn more?​

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