When I had enough time for investing, just before my last promotion, I used to do Forex. Not all the time but, few trades a month. I won some, I lost some. I think I did end up in net profit out of those trades. Forex trading, I feel is less risky than stock trading, as you’d inadvertently start with less amount of money. But regardless, you must exercise caution and take baby steps until you are accustomed to the rule of the game.
Trading on the forex markets can be very lucrative, but inexperienced traders often make simple mistakes that cost them money. The right money management tips are the difference between a profit and a loss. Read on for some advice on how to better manage your money and your risk.
Understand the Risk
Forex trading is a risky endeavor, which is why risk management is our number one tip. Understand your risk profile before you begin trading and know how much you are prepared to risk on any one trade.
Experts recommend that risk limits are set at 2% per trade. Use this figure to calculate your stop losses.
Set Stop Losses
Following on from the last tip, it is important that you use stop losses to limit your risk. Putting a stop-loss order in place will ensure you don’t blow your account.
A stop-loss may not always be implemented, by they are useful. If you don’t understand the difference between a trailing stop limit and a trailing stop loss, now is a good time to find out.
Be Careful when Leveraging Trades
Leverage lets you borrow when trading, so the money you invest is significantly greater than your capital. Trading accounts and brokers such offer different leverage margins.
These can be anything from 50:1 to 200:1. The good news is that a high leverage can significantly increase your potential profits from forex trading.
The bad news is that leveraging trades can also increase your risk of making a loss far greater than your capital.
Keep a Record of Your Trades
It is helpful for inexperienced traders to keep a journal tracking their trades. Record details of each trade, such as your stop losses and whether the trade was profitable or not.
This should help you identify patterns, and whether your trading strategy is successful.
If you spot any problems, or your money management isn’t working, use this as an early warning system that you need to look more closely at your risk per trade, stop losses, etc.
Keep a Cool Head when Trading Forex
Experienced and successful forex traders don’t let their emotions get the better of them. To be profitable, you need to keep a cool head when all around you are losing theirs.
Once you let your emotions dictate what happens next, you may as well throw your money away. Inexperienced traders make silly mistakes such as using too much leverage in the belief they will make more money or closing a position too soon because they fear it will lose them money.
Always stick to a trading plan based on careful market analysis and sensible entry/exit levels. Don’t let your emotions run away with you.
If you do get it wrong, learn from your mistake and use this knowledge to educate your trading plan going forward.
Forex trading isn’t always easy, but if you follow the money management tips above, you should be able to avoid making the worst newbie mistakes.