Money Management and the Art of Successful Trading
Description: Tips to manage your money and keep trading successfully.
If you are trading the Forex markets and you do not have any principle that will help you protect your trading capital at all times, then you are on your way to becoming part of the 95% of traders that do make money from the markets.
Most serious traders have laid down money management rules embedded in their trading strategy. This article will help look at money management tips you can incorporate into your trading plan.
- Do not trade with money you can’t afford to lose
If you have already seen a few months as a trader then this may not be of concern to you, but if you are just starting out then it is vital that you do not risk any funds that you may consider very important to you. This includes your retirement savings, rent, etc. Equally, do not consider trading with borrowed funds, as you will only be under huge pressure to turn a profit and return the money. If a trade starts going against you, your emotions will make you quickly jump out of the trade, taking an avoidable loss. Therefore, only start out on trading with funds that you can lose, and because of the loss of which you will not go bankrupt or land into financial difficulties.
- Never risk more than you are comfortable with on a single trade
As a matter of fact, your trading plan should include how much you are comfortable with losing on a single trade. It could be 2%, 3% or 10% of balance at any given time. Do not go above this regardless of how compelling and mouth-watering the trade opportunity is. Most times, when a trader increases position size, the market turns sharply against the trader, leading to a panic close of the position or taking huge losses later on if the trade doesn’t go back in the trader’s favour. To help you stay on track, create a column for the lot size you will use for positions when you hit a certain balance. For example, you could stipulate 0.2 lot size for a $1,000 account, 0.4 for $2,000, 0.6 for $3,000 etc. These figures are merely fictitious and should not be taken as is.
- Avoid greed by detaching yourself from your trades
Greed is the biggest killer of Forex traders’ funds. Humans are greedy naturally, and will do all they can to get more money on business ventures; but, while other businesses could reward you handsomely for greed, Forex trading will punish you mercilessly. Greed will make you use lot sizes much bigger than your account can handle; greed will also make you jump into trades even when your trading strategy has not given you a go-ahead signal to get into the trade; greed will equally make you move your profit target – from the original point you placed it at, to another position. The only way to avoid greed is to follow your trading rules to the letter and close your computer and move away. Come back after an interval (4 hours later, preferably) to see if your position either hit your profit target or took out your stop loss level. Staring at your computer after taking a trade is one big money management killer you must avoid at all costs.