All the successful traders use a top money management strategy along with their daily trading plan, and if you have ever experienced the severe drawdown on the account, you probably do too.
Having safeguard in place to protect your account to remain in business is far better than the alternative. Follows some general guidelines for the money management which can be included in the trading plan.
Tip 1: Only Trade with Risk Capital
Trading currencies involve taking substantial risks, no matter how you look at it. Because of the free-floating currency market, currency trading has considerably more in common to gambling than the investing.
As a result, putting funds at the risk which you cannot afford the loss should never even be considered by the responsible forex trader. It includes money needed for key housing expenses such as your mortgage or rent payment, or the weekly food allowance required for you or your family’s sustenance.
In general, traders do better by only trading forex with the funds known as risk capital. Such money has been designated explicitly for the trading because it is expendable and therefore not needed for the essentials of living.
Tip 2: Cut Losses Short, Let Profits Run On
The idea behind this adage is that you should first Endeavour to manage the risk by using stop losses in a disciplined way.
Secondly, you should allow your profits to accumulate when you have the winning position. Traders often use trading stops for the purpose.
Tip 3: Avoid Using Too Much Leverage
Because of the nature of the forex market as a venue of exchange for the currencies, initiating the forex position involves the equal value exchange of two currencies. It requires no money initially, in theory anyway, because it is not purchased or sale of a commodity or stock, but instead represents the rate of exchange.
Most online forex brokers, therefore, offer their customers leverage ratios which can be as much as 500:1. It means that for every dollar you place up as collateral against the potential losses, you can control $500. While the sort of leverage can be extremely profitable on the winning transaction, it can also delete your account just as quickly, cleaning it out in just one sharp forex move.
Leverage must be only used if you keep the size of any potential losses firmly in mind. This is way; your portfolio will not suffer severe, unplanned drawdowns if you find yourself on the wrong side of a market, as almost all the forex traders do at one time or another.
Tip 4: Avoid Taking Too Much Heat
The heat factor when trading consists of how comfortable you think about the amount of risk you have assumed on any given position.
Essentially, if you can’t sleep at night time because you find yourself worrying about the forex trading positions, then you will usually be taking on too much heat in your trading portfolio.
This tip involves only taking the positions you feel comfortable with and keeping your trades to a flexible size in proportion to overall account size.
Tip 5: Do Not Give into Greed
Greed leads to some risky trading errors. These include overtrading, excessive risk-taking and failing to take profits at appropriate levels.
One of the best ways to deal with the greed when it inevitably arises when trading involves having appropriate safeguards against it built into the trading plan.