Money management is the most important aspect in forex. Even if the estimates of investment in forex tend to be accurate and correct, in the long term may no longer be, so it is essential to implement good forex money management techniques.
The key for success in forex trading is to take big risks and look for higher profits. But this is true and applicable when dealing with virtual money in demo accounts.
When real money is being used, even risk takers back out sometimes. There must be an understanding of risk and an understanding that a large amount of risks that influence the forex market offers.The market certainly helps you to earn huge profits,but it can take the same amount of loss also if risks are not managed accurately and on time.
A good method of risk management defines that you should never risk more than 2% of your capital on a trade and should never risk more than 8% of its capital on all open trades.With this method of risk management you can lose three consecutive trades and lose less than 6% of your total capital.Most beginners enter in the forex market in a kamikaze mode and annihilate the account in 2 or 3 trades.
Since any Forex trading involves risks,what you need is to measure the risk taken in comparison with reward received.A risk/reward ratio can be determined by dividing a profit-making spread over a corresponding stop-limit spread.No rollover or differential in interest rates is necessary.
Your Forex trading techniques should include sufficient funds to enable it to engage in various orders.If some trades result in losses,these losses have the potential to be recovered with other winning trades.If half or more of your trades result in a loss,it is necessary to analyze and adjust your Forex trading strategy.
Disciplined money management in forex requires that when you place a trade due to some sign of your trading strategy,you always specify three prices:
- The entry price: how much are you willing to spend on trade;
- The price stop loss: how much are you willing to lose on a trade before closing the position;
- The price to take profit: the amount of income you require before closing completely or partially out of position.
The more you set your price — stop loss to the entry price,the more likely to be stopped out.This is the fundamental compromise between profits and safety and each trader must personally work on a satisfactory balance.
Another smart strategy of money management in Forex is to avoid positions in two currencies,that tend to move together, as the AUD/USD and the EUR/USD. These coins are correlated.since this two pairs moves in the same direction up or down not always but most of the time,you should look to select another pairing which is not correlated with any of your other open trades.
Before deciding to trade foreign currency, you should carefully consider your investment objectives level of experience and risk appetite. Remember,you may lose part or all of your initial investment, which means that you should not invest money that you cannot lose with forex money management.