Forex Money Management

There are two types of Forex trader; those who trade seeking for the big payoff or jackpot, and those who seek long term consistent profits. It is much more likely for one to become a long term successful trader than a one hit wonder who retires with millions. There is not trick in Forex success, you simply have to work hard, be consistent, have a trading plan, and manage your money. The last factor, managing your money, is what truly determines your level and rate of success in the Forex market. The truth of the matter is, even if your trading plan is profitable on 90% of your trades, the 10% trades that potentially end up in losses can easily cripple you financially.

Manage Risks

For effective money management, traders have to limit the risks they expose their Forex accounts to. A reasonable strategy is to limit the amount of risk undertaken in each trader to a maximum of 2% of your total Forex account. This makes it possible for one to continue trading even after a long run of consecutive losses. Another strategy one should adopt is to avoid trades with high risk/reward ratios. Preferably, one should stick to risk reward ratios of 1:2 or lower. Beginners should put the limit at 1:3 while even the most experienced traders should avoid trades with risk-reward ratios of 1:1 or more.

Use Stops and Targets

Another money management strategy is to use stop loss orders to limit the amount of loss one can suffer in any single trade. Typically, one should adjust stop loss levels according to the position size on each trade. This ensures that when the trade becomes a loss-maker, you will not undergo a loss that will be too high to comfortable manage.

If the trade is profitable, a trader needs to make sure he or she collects profits before any price reversals occur. Therefore, it is advisable to set take profit levels which close out the trade once a certain profitable price level is reached. An even better way to lock in profits yet stay in the trade if the prices continue rising is to put trailing stops.

Wise Leverage

Forex brokers offer high leverage levels so traders can enhance their profitability from small pip gains on small investment amounts. However, high leverage levels can potentially wipe out your Forex account and in some cases even land you in debt. Do not abuse the leverage offer, instead use reasonable leverage amounts that cannot result in unduly high losses.

Overtrading

Market signals and social trading are some of the tools we use to make profitable trade decisions. However, sometimes we get so many positive signs and get tempted to open multiple positions. This makes it difficult to manage each trade and thus exposes your account to higher risks. Additionally, trading just for the sake of staying in the market is potentially disastrous and should be avoided.