Strategies for Efficient Forex Money Management

There are times when a forex trader becomes so engrossed in his trading tactics that he forgets about developing a forex money management strategy. This is unfortunate, as becoming too focused only on the current trading session can have disastrous consequences.

There are several aspects of forex money management that a trader has to consider, but among the most important are the spread, margin and returns.

Ideally, spreads should be researched thoroughly before an individual signs a contract with a forex brokerage firm. Basically, spreads are the variation between the bidding and asking price of a particular currency. What matters to you is that the tighter the spread, the more money you will save.

If you have any experience in stock trading, you have to be aware that in the forex, there is no exchange center, meaning the spreads will vary greatly from brokerage firm to brokerage firm. The account you signed will also determine greatly the spread you can avail of.

Generally speaking, Mini accounts offer spreads that are usually double those of Standard accounts. In turn, Premium accounts offer the tightest spreads. In short, the bigger the deposit, the narrower spread. Your forex money management strategy should also take into consideration fixed currency spreads. While constant rates can protect you from the volatility of the forex market, the spreads are generally wide.

Another important element in creating a forex money management strategy are returns. Here you will see another characteristic that distinguishes the forex from the stock markets. Paper and realized profits (and losses) are very common in the stock exchange, but they do not matter in the sense that it does not affect the value of a trader’s account.

The situation is different in the forex market, because futures contracts require margins, a cash deposit that serves as a guarantee in case of future losses. Unlike the equities market, the value of the margin rises and falls depending on the value of the contract.

For instance, a forex trader with a $100,000 account enters into a contract with a $25,000 margin. If the value of the futures contract rises by $3,000, the trader now has $78,000 worth of margin. Accordingly, if the value of the contract falls by $10,000, the margin will be down to $60,000. Therefore, returns should be taken tino account.

Even if you rigorously study all the fundamental issues and know all the technical indicators by heart, it is always a good idea to include consultations with your broker in your forex money management strategy. There is nothing wrong with asking their advice, and who knows, they may offer a fresh perspective on the subject you did not see before.

Too many forex traders have lost a fortune from a lack of proper money management strategy. You can avoid this by monitoring and ensuring that your account is balanced, and by taking into account the forces at work in the forex. This will undoubtedly help you earn profits and manage your finances.