Money Management is what forms the most important part of the Forex Trading. If the traders and investors don’t know to manage money then they can’t survive longer in the Forex world. If a trader is enjoying profit then he must also be prepared for loss. It’s just like driving a bike; if you are accelerating and speeding up your bike then you must also be prepared to apply brakes anytime in traffic. The traders and investors should follow some tips for the Money Management part. They should use limited average, 10:1-20:1 is preferred. The traders and investors should wait for the right opportunity to enter a trade and should never trade without placing stop loss. Traders should plan their strategy assuming the worst case.
Money Management is not an easier part of the Forex Trading. The traders and investors should follow some Money Management Styles to manage their money. The Equity Stop, Chart Stop, Volatility Stop and Margin Stop are the major Money Management Styles. According to Equity Stop, the traders and investors should use stop loss and the stop loss should depend on the amount that the traders can afford to lose in one single trade. According to Chart Stop, the traders and investors should use technical indicators to determine the stop loss. According to Volatility Stop, the traders and investors study the volatility of the market and adjust themselves with the present market situation. According to the Margin Stop, the traders and investors should divide their total investment in smaller parts and should proceed their trading with these parts. The main aim behind this strategy is to bring next part only if one part is lost.
If you are a Forex trader and wish to earn profit maximum times then you must know how to manage risk. Measure the risk before managing it. There are number of factors involved in Risk Management such as know the odds, liquidity of the market, risk per trade and the leverage you take. The traders and investors must use technical and fundamental methods to analyze the odds of their trade being successful. Nearly trading of $2 trillion per day is done in this market. So at any time at any going price there will be sufficient number of buyers and sellers and this is the Forex market liquidity. Risk per trade is the next important factor in studying the Risk Management part. The traders and investors must not prefer to take a risk of more than 2% per trade. Leverage is broker’s money or banks money allowed to the traders to trade. This leverage can be in the ratio of 100:1 or sometimes may be in the ration of 400:1 also. It is better not to use the maximum allowable leverage because higher the leverage you take; higher will be the chances of going in losses.
Stop Loss is used to limit your loss and the traders who do not set Stop Loss will have no limit of loss and sometimes it may be possible that whole of their investment goes in loss if they have taken higher leverage and the price starts moving against them. So to avoid such a situation never place a trade without a Stop Loss. Maximum Drawdown in simple words is the biggest drop of price from peak to bottom in a fixed period of time.
Every Forex trader and investor should follow five basic and very simple principles of Forex Trading if he or she wants to be known as a gainer. These simple basic principles says that do not trade without a plan, never forget to place stop loss on your trades, control your emotions and exit from a trade timely to be at profit side even if profit is little because something is better than nothing, trade less and trade wisely and be aware about your mistakes and depend on the latest market news. Following these simple basic principles will allow anyone to earn at least little more than their investment.