Managing forex money is important to increase profits and reduces losses which can arise if not monitored. In the highly fluctuating forex market, the movement of one currency against the other creates opportunities which traders take advantage of Many a times, the risks are overlooked by the amateur traders and they land up losing all their capital. The problem deepens when the invested capital is used as margin and larger sums of money is traded in the currency market looking at possible profits without analyzing the pitfalls. For a beginner in the currency market, it’s iamportant to understand the basics and stick to them to avoid such scenarios.
Some of the key points to know while managing forex money management are –
Wait for right opportunity and do not chase the market – often the new traders in the forex market, are excited seeing the fluctuation in the market and tend to trade more than required. It may leave one with a bitter experience and heavy losses. Trading is not meant to be done every day. Rather studying the market to determine the direction gives clarity. Thus one should not chase the market for opportunities but study the trend and then invest or trade.
Determine risk per trade – the amount one is ready to risk in a single trade is the risk per trade. One should not go more than two-three percent of the account on one trade in order to have a cushion when the markets go against the investment.
Losses should be booked before they accumulate – not all market calls will prove to be fruitful and lead to profit. Not often do we hear of all trading calls being right. To be on the safer side, one should cut the losses short and the profit making investments can be continued. Entering a trade position is just as important as exiting the same. Unless timely action isn’t taken, one losing trade call can erase the profits made from many previous calls. Pinning the hope on a trend reversal may encourage the traders to book profits early and also hold on to losing trades.
Be cautious while leveraging – while leveraging is a good tool for increasing your profits manifolds, it also equally enhances the chances multiplying your losses. Every time a trade is entered into, before looking at the possible profits, one must understand the losses which may have to be booked. Protecting one’s capital should be the main principle than seeing soaring profits.
Always use stop loss orders – in order to improve the profitability while managing the risk, the market order ideally should be with stop losses. This helps to understand the possible gains and losses even before they occur. Pre-determined stop losses ensure that the loss making open positions are squared before they get in deep red.
Trailing stops to lock-in profits – to maximize the benefit of profits, a combination of different stop loss orders should be used. A trailing stop loss is used to book profits when the market trend is strong. This automatically keeps locking the profits while the trend is a friend and the trailing stop loss level will move the stop loss levels.
Greed and fear – problem with trading are the biggest emotions - greed and fear which take the front seat and drive the trader to take hasty decisions. These emotions should not get the trader to take any decisions and thus a trader should not get afflicted towards any currency pair(s). Unrealistic profit targets (read greed) don’t encourage profit booking at the right time which is similar to fear when the profits are booked too early in the trade.
Appropriate position sizing – the quantum of trading is equally important as in the risk per trade. The position sizing defines the potential profit for a trader.
The above points are amongst the other important points which should be considered especially for a new trader or a beginner. Unless these points are kept in mind, the profitable trading strategy too may not hold its fort and give in to risk.
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