Money management has a magnificent role when it comes to trading. Without proper money management tactics, trading would be almost gambling. Every profitable trading strategy is based on convenient money management rules and a solid risk management plan.
What is Money Management in Forex？
Money management refers to a set of practices and predefined rules to follow in order to manage money more effectively, increase profitability, minimize losses and make the most out of the trading account. Traders apply money management techniques to keep track of the trading performance and achieve constant profits.
Rules of money management should be an essential factor in a well-developed trading plan. Understanding money management and strictly following self-imposed rules can make all the difference to your forex trading performance.
Why is Money Management Important？
In the Forex market, it is not always about anticipating future prices. Being a successful trader depends on your commitment to your rules. Even the best trading strategy won‘t help much in making your trading successful if you don’t apply proper money management rules.
Most forex beginners dont pay attention to money management as they are more focused on getting into the best out of trading. So, they tend to open many and large positions which usually blow their first trading account in a short time. Sometimes traders start to think of money management when they fail more than once. That is a common mistake made by many. In fact, starting your trading journey correctly by controlling your potential losses and trading risks plays such an important role in trading.
“Rule No. 1 is never lose money. Rule No. 2 is never forget the Rule No. 1.” – Warren Buffett
Top Money Management Tips for Forex Trading
Always Use a Stop Loss Order
The forex market is highly unpredictable especially when it comes to price volatility. Thats why using astop lossorder will help you minimize losses as possible if the market goes in the other direction. It is an essential rule in both money and risk management. A Stop Loss order is used to automatically close a trade when the price reaches your set price level. It is usually placed with a market order or a pending order.
Calculate Your Position Size
Position size is crucial in money management, as it measures the potential profit. Determining the proper lot size will depend on your risk tolerance and account size. Calculating how much money you are putting at risk per trade heavily relies on the lot size. For example, using large lots on small accounts may cause instant money loss. LearnHow to Calculate the Proper Position Size.
Use Leverage Wisely
Forex leverageis borrowed capital to maximize an investments potential return. It also gives traders the ability to increase the trading capital with a relatively small deposit, the margin. Despite its various advantages, it entails huge risks if not applied properly. High leverage may seem highly tempting as it magnifies the investment capital and potential profits, but what is always being overlooked is that it magnifies the possible losses as well. It is advised to choose the proper leverage level according to your experience, capital, goals, and risk tolerance.
Money Management Vs. Risk Management
Both money management and risk management are designed to protect the traders funds, but each has its different approach. Some investors confuse money management with risk management despite the differences between the two of them. Money management is more focused on protecting the trading capital while risk management is identifying potential risks.Risk managementis a tactic used to identify potential risks to the investment in advance, analyze them, and take precautionary steps to avoid their impact.
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