The Importance of Forex Money Management

Forex trading isn’t all about getting the right analytics and strategies. In fact, a great deal of trading in this financial market is actually about solid forex money management.

Managing your funds correctly is what will ensure that you keep your account going — and there are many things that can potentially threaten your forex money management if you aren’t paying attention. Here are a few of the leading threats to money management and how to manage your risks to ensure success…

The Dangers of Poor Money Management

The forex market doesn’t just move incredibly quickly — it also involves large amounts of leverage.

When your account is leveraged 200:1, a single large trade could wipe your account out. This is exactly the situation that you want to avoid. The first thing you need to understand about forex trading and the market is that it doesn’t operate like other markets do; every risk and every reward is amplified. So while you’ll make impressive amounts of money right out the gate, there will also be the potential to lose that money.

The second thing you need to know about the forex trading market is that the amount of money you can make is related to the amount of cash that you have in your account, even with leverage in place. That means that every loss damages all of your future earnings when you are trading a large amount of your account; if you need to rebuild your account from a significant loss, you’re going to find yourself doing it at a turtle’s pace compared to the leaps forward that you were making previously.

Poor money management can quickly turn a winning account into a losing one — and it can happen in 24 hours or less.

There are issues that can occur that will exacerbate the problem, but in reality, simply losing track of your trades for a few hours is more than enough to create a money management issue. Even if each subsequent individual trade is a successful one, poor money management will let a very bad trade become a terrible one. And poor money management can happen for a variety of reasons: a simple lack of attention at a critical moment, emotional investing, or even a global event.

Improving Your Forex Money Management

So here are a few of the most effective management techniques to use to safeguard your trades.

  • Avoid trading the same currency in the same direction. If you have a EUR/USD trade open, you don’t want to open a USD/JPY trade in the other direction. This is where many people who are following their analytics but not thinking about their money management will falter. It’s easy to just look at the raw data and think to yourself “that’s a good trade,” but the truth is that the EUR/USD and USD/JPY trades will be performing inversely often because of either the strength or weakness of the dollar. When the dollar then dramatically shifts — either up or down — both trades will move. That might seem like a good idea, but it’s really a loss of control, because you now have too much money tied up in a single trade. Note that this doesn’t count if you intentionally trade only half your tradable funds in each; this could be seen as a form of hedging.
  • Don’t trade too much of your account at once. Regardless of how solid the trades are or how diverse they are, you should never be trading in a volume that would threaten your account margin. Some individuals trade 10% of their cash, other 20%, and some brave souls could trade up to 25%. Set your amount early and do not deviate. Remember: trading, especially high stakes trading, is all about consistency and No Nonsense Broker.

Forex money management is what will separate successes from failures.

so read more about What is Forex trading All about!

Everyone can create, stumble upon, or just follow a successful trading strategy, but few traders have the discipline and the knowledge to ensure that their money management techniques are consistent. With appropriate money management, you’ll be able to build your account, generate revenue, and avoid any potential shortfalls that could end your trading career in Currency Trading Signals[/vc_column_text][/vc_column][/vc_row]

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