Forex: Effective Money Management Techniques

In order to trade successfully in the forex market, it is important to add effective money management techniques in your trading plan so that you can maintain your portfolio properly and safeguard it against unexpected losses. This will not only help you against losses, but will also be helpful to make profitable trades. Following are some of the techniques that can be part of your trading plan:

Invest the funds that can be used as a risk capital

Due to the free float of currency in the currency market, it carries a high risk of trading for investors. Therefore, traders, who do not have sufficient money to invest and who cannot afford to lose their money, should not expose their funds to risk. For example, if you have bills to pay, or your mortgage payment is due every month, you should not consider putting that money in the currency market.

The best and most appropriate way to trade in the forex market is to invest the capital that can be exposed to risk, and that will not affect your overall financial position, because this money usually does not have any other use and is solely used for trading the currency pairs

Accumulatep profit in case of winning position

One of the best advices passed on by the Wall Street to the new entrants is to let the profits flow if you have winning trades, and for that matter, trading stops are used by the traders. Every trader, who has been trading in the market, knows that profits are managed automatically if you know the amount of funds you should not lose.

Manage your risk with stop-loss

If you are experiencing losses, it is wise to stop trading in order to avoid further losses, since there is high volatility in the currency market and a trader can lose big if he or she is experiencing constant losses. A forex trader should always learn to manage the risk in order to limit his risk exposure. The best way to do it is to use stop losses in a well-organized way.

Keep your leverage position to a minimum

The brokers usually provide a leverage ratio to the forex traders, and that ratio can also be 500:1. This shows that you can exercise control over 500 dollars for each dollar you use as collateral against expected loss. Although, it seems like a very profitable position if you have winning trades, yet, it can deteriorate your financial position by exhausting your account balance in no time. Therefore, you should only use leverage if the size of expected losses is acceptable to you, so that the risk of a portfolio is properly managed.

Try to limit aggressive trading

One factor that every trader should consider is the level of risk he is willing to take in forex trading, and how comfortable he is with it. If he is always stressful and restless due to his trading position and it is not possible for him to sleep at night, it shows that he is trading aggressively and is under a lot of pressure. This will not only have an adverse impact on his portfolio, but will also affect his overall financial position. So, it is recommended to limit aggressive trading unless you have a lot cash in your account.

Greed is good, but never too good when you trade in a volatile currency market

“Greed is good” is a famous quote in a financial market, yet, it always has a downside to it. Many forex traders are tempted by high and quick profits associated with the currency trading. However, if you get too greedy about these profits, it will lead to unpleasant consequences due to high risk trading errors, such as, failure to achieve profits till certain level, overtrading and taking too much.

Therefore, in order to control the greed, it is important for every trader to design and implement a proper trading plan and monitor the trading results closely in order to take reasonable trading decisions, because the forex market is a highly volatile market and taking too much risk can cost a forex trader his whole fortune.

by Adil Adeel - Senior Editor at Free100Forex


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