Trading Forex can be overwhelming. If a trader doesn’t have strong strategies to follow, they risk losing a lot of money to the high volatility of the market. Trading strategies are usually given more emphasis in many Forex articles.
However, without proper money management, all the trading efforts can go to waste. Forex money management aims to balance two important things: reducing possible losses to an acceptable level, and maximizing potential losses.
If you are keen to build a successful Forex career, here are some tips to save money as you trade.
1. The 1% Rule
The rule restricts the amount of money you can put on a single trade to 1% of your account value. If your trading account currently has $10,000, the most you are supposed to risk is $100. This helps to protect your capital from significantly declining in value in case you lose on a trading position.
Even the savviest trader doesn’t win every trade. But with the 1% rule, you would have to lose 100 trades to blow your account dry. Why then do beginners lose all their money not long after they start trading? It’s simple; not many beginning traders follow the 1% rule.
2. Use a Demo Account Before Risking Real Money
Regardless of how much you have learned from your Forex marketing blog, don’t jump right into trading with real money. Demo trading allows you to gain practical experience with Forex trading strategies. You also have time to identify and avoid mistakes that can make you lose your money. Be patient enough to learn the trading skill and art. Even if you will take 2 or 3 months before trading with real cash, demo trading will set you up for Forex trading success.
3. Think More Like a Risk Manager
When looked from outside, Forex trading seems like just pouncing on opportunities. In real sense though, it is more of carefully weighing the risk associated with each possible trade. Defining your risk before taking a trade position ensures that you take a risk that will allow you to sleep at night. Don’t be the trader that looks at available trading opportunities and only sees potentially big profits. Downplaying risk is the first step toward severe losses.
4. Understand Leverage
Leverage is a tricky concept for many traders. While it gives you a chance to magnify your profits, it also increases the risk your account is exposed to. The most important thing to understand about leverage is the associated overall risk exposure with every leverage position you take. Your risk exposure level increases with the level of leverage. Beginners should avoid high leverage until they have a good understanding of the concept.
5. Don’t Trade too Aggressively
Trading aggressively is perhaps the biggest mistake traders make. They make a sequence of inadequately thought out trades that can diminish their trading capital should the trades turn out to be on the wrong side of the market.
Successful traders calculate and adjust the risk associated with a trading position before taking it to ensure that no single trade has too much risk. Different currency pairs have different levels of volatility. It is prudent to take smaller positions for more volatile pairs. Charting tools help to chart movements of pips during particular time frames.
6. Avoid Trading Soon After Losing Big
Abrupt bad turns by the market can wipe out a considerable portion of a trader’s capital. Naturally, a trader would want to reiterate and try to make up for a big loss in subsequent trades. Experts advise against entering trading positions with an aim of regaining lost capital because it increases the risk of the portfolio just after it has been stressed. Taking a break until one can identify a profitable trade is the recommended next step after an unexpected loss. The trader can also reduce his trading lot and take some time to let emotions become steady.
7. Acknowledge Your Mistakes
Strategies set rules and guidelines for trading. If you want to run the profits and cut losses, take situations as they are and refer to the set guidelines. If you place a bad trade, exit the market instead of trying to turn the mistake into something else. Realize that no trader has any control over the market. So, whenever a mistake happens do what is in the best interest of your account.
It is crucial to have a money management system when trading forex. The above tips encapsulate almost everything you need to do to avoid losing your money and maximize your profits when trading currencies. From the basic risk management principle of investing, that is, not risking more than you are willing to lose, to knowing what to do when the market turns on you, prudent money management is your key to success in Forex trading.
