Optimal money management is what makes the difference between rookies and seasoned traders on the Forex market. Also, money management is something that most Forex traders are preaching but don’t stick to in real life. To avoid runaway loss, you must implement some strategies and stick to them. In order not to be quickly kicked off the Forex market, forget the Big Wins, and avoid the fate of learning tough lessons.
Your profit opportunities are always associated with some risks. Money management on the Forex market can be thought of as a powerful toolkit that you can use to increase profits and keep your losses at an acceptable level.
If you are a rookie, there are some valuable tips you can implement when creating your trading strategy. We will give within the next lines some advice to consider.
1. Use your Leverage Carefully
One of the main reasons why traders choose Forex is access to leverage. The leverage provides the opportunity to trade with a reduced margin – you invest less money, and your earning potential is greater.
Leverage increases the speed of your gains and losses. If you lose, you are likely using too much leverage for your money management. Although trading with smaller contracts is an attractive option to avoid potential losses, it also reduces your potential gain. So always choose your leverage carefully.
2. Don’t Be Trapped By Wrong Market Analysis
Forex is subject to constant market movements. Each order can initially be negative because of the difference between the buy and sell prices. In a very volatile environment, it is entirely reasonable to sometimes be wrong on the market analysis and to lose on some orders. What matters is not the loss per se, but the amount of that loss. Before placing stock market orders, you need to define how many losses you are willing to accept. Also, keep in mind that putting in too tight stop-losses can generate automatic order closings too often. Remember, not every order will be a winner.
3. Stop-Loss Mechanism
The market is constantly influenced by news, opinions, trends, and political decisions. Here are two examples: a major central bank announces a decision on the primary interest rates and causes significant market gaps, or a professional market player sends several orders to the market with huge volumes to intentionally generate a substantial change in the price.
Even if you consistently follow the market, sometimes it is impossible to predict some changes. What you can do is to set up automatic order management mechanisms, such as stop-loss. Remember, the stop loss cannot help you completely avoid the loss; its main purpose is to reduce the losses to an acceptable level for you.
4. Stop-Loss – Know Your Limits
Forex quotes change quickly, especially when the market is volatile or nervous. Usually, a cleverly placed stop-loss reacts much faster than a human. Stop-loss that you can apply in your strategies is equity stop, chart stop, volatility stop, or margin stop.
It would help if you chose the most suitable stop-loss by answering several questions.
- What is the time horizon for the order (remember – a long-term order is an order prey to volatility)?
- What is the desired closing price, and when do I expect the market to reach this price?
- What is the capital of my trading account, and how many funds are available?
- Are other positions already in progress?
- Is the size of the order appropriate to the balance of the trading account, the economic calendar, and the current market situation?
- What is the general market sentiment (e.g., volatility, nervousness, pending news, and other external factors)?
- How long will the market remain open (is the market closed at night, is the weekend coming soon)?
5. Keep An Eye On Market Gap
These are large price jumps visible on a trading chart. The market gap generally occurs when markets are closed, and current news has a significant influence on prices. In this case, the opening price will not be the same as the closing price. Why is it important to understand market gaps? Because in this scenario, mechanisms like the stop-loss cannot work, and orders are executed at the first price available on the market.
Following the advice we gave should help you manage your money better and become a better Forex trader. But also don’t forget some psychological moments: let the patience guide your steps, avoid fear and greed overwhelm you. If you are a complete novice to Forex trading, while setting up your money management strategy, we recommend you use a demo account so you can test the types of orders and margin calls under several market conditions.