Entering the foreign exchange market without precautions could be compared to driving an F1 car without a safety helmet. If you intend to trade the forex markets with a pragmatic view to be successful, you might want to setup and follow a trading plan which incorporates some money management procedures and safety features. Possibly all successful financial market participants are employing their own money management strategy because they were educated to do so, or because they learned the hard way when they saw a large chunk of their funds disappearing. Therefore, it makes a lot of sense to put some rules in place to keep your account on FinancialCenter healthy for as long as possible. Here are a few tips to help you do so.
Risk your extra cash only
No matter how much you know about forex trading, or how experienced you are, there will always be risk involved in every trading position. Foreign exchange are markets which involve sometimes close to $5 trillion of daily trading volume, and volatility is always present. Therefore, risking money that you can’t afford to lose is always a bad idea. These might include savings for kids’tuition fees, mortgage loans, and other essentials. Traders should only risk funds put aside only for the purpose of trading, also known as risk capital.
Cut your losses, allow your profits to run
This essential tip urges traders to manage their risk by placing stop loss orders on their positions. It also says that they should allow profits to accumulate whilst they are on a winning position. The use of take profit orders is a good method of doing so, without having to manually close the position during a winning streak.
Handle leverage with care
Because of the often negligible exchange rate changes of currency pairs over short periods of time, many forex brokers offer substantial leverage ratios which might even reach as much as 400:1. With the level of leverage in this example, a trader can control $8,000 by depositing only $20 in his trader account. It is therefore easy to imagine making substantial profit on a winning trading position. However, leverage has a dark side as it can work on destroying a trading account after one sharp price move against your favour. Only use leverage when you have in mind the potential losses, and also their size.
Stay cool from the heat
Don’t get confused, this is not the type of sun heat that causes skin trouble. Level of heat in the trading context means the amount of risk that you are comfortable with. For example, if you are biting all 10 of your hand nails after you placed some trading positions, the chances are that you took too much heat. Stick to positions that you feel comfortable with, and avoid trading large proportions of your account.
Don’t become greedy
We all fell in that trap at some point in our lives, especially when dealing with money. Additionally, greed within a trader’s head leads to many mistakes such as overtrading, taking too much heat, and not using stop loss and take profit orders. The best method to deal with greed, and essentially any emotion when it comes to trading, is to have a concrete plan that you follow instead of making emotional decisions.
Money management may be an integral part of a trader’s overall plan and may save him at least from the above-mentioned traps. It may also keep at bay any emotional trading reactions and will help to keep your account sustainable in the long term.
By David Parker,
nice post is very helpful post for saving and manage money