The Forex money management involves around maximizing the potential profits while curbing the risks associated with losses so that the effect of the same is minimal. In order to attain these objectives the individuals will need to prepare themselves through a simple but effective trading plan which will as a guide and help them succeed at trading.
A trading plan will allow the individuals to understand:
- The best time for entering/exiting;
- Which currency pair to trade;
- How to manage money etc.
Using this plan the traders can even make use of the potential online platforms like the easymarkets.com to access the markets they wish to penetrate. In order to manage money effectively they must always keep in mind that:
1. Risk capital should be quantified
This might seem a trivial task but it has a direct impact on money management aspects as much stems out from the approximate key values. This will also assist in determining the upper limit of the position size. The traders can easily identify to what limit they wish to expose to risk in terms of overall risk capital in a single trade.
2. Trading over aggressively
One of the most common mistake made by the new traders is that they trade a bit too aggressively. It must be kept in mind that if an insignificant loss is able to eradicate a larger portion of the risk capital then each trade has a greater risk associated with it. To avoid this scenario the position size will have to be re-adjusted so that it aptly reflects the volatility of the trading pair. It must also be remembered that the more volatile currencies will require smaller positions.
3. Keep realistic expectations
The overly aggressive traders act this way because their expectations are not realistic. They are of the view that the more aggressively they trade the chances of them gaining wealth will improve as well. This unfortunately is hardly ever true. It is more important to be steady with constant returns in this game. The benefit of steady returns is that by the end of the year the profit accumulates to a much greater amount due to the compounding factor.
4. Admitting mistakes
The basic rule of the trading game remains the same for all traders which is to minimize the damage and run the profits. Therefore it is vital to exit as quickly as possible in case of a bad trade. Many traders have fallen into a trap by trying to fix the situation. This in most of the cases is a major mistake in case of Forex trading and money management. What the traders overlook is the fact that they cannot control the markets.