FOREX MONEY MANAGEMENT
Money management is one of those skillsets that separate experienced traders from amateurs. Like many aspects of successful traders, it may lack the daring devil-may-care aesthetic that some traders like to cultivate, but make no mistake about it, it is a great asset when it comes to successfully trading in Forex or any other market.
Forex trading can be an emotional business, involving both the head and the heart. We don’t like to admit that we’re wrong and we are unwilling to accept that we have just lost a lot of money. When we practice sound trade management and trade with a plan, we exit our trades when our plan dictates to us that they have failed. According to this stoic, unemotional criteria that we have determined before we ever opened the trade, we can avoid the emotional swings that would otherwise drive us to horrible trading decisions and loss upon loss to our trading account.
Forex Trading is a Marathon, Not a Sprint
It is not at all unheard of for Forex traders to lose 50% or more of their accounts in a single trade. That sort of disaster is exactly what sound money management is intended to prevent. When one recognizes that Forex trading is more successful when it is approached as a marathon rather than a sprint, one comes to accept the losses, exit the trade, and continue with their trading process.
Many traders who are just starting out envision one big trade that will make them rich and change their life forever. This is more fantasy than reality. The short executed by George Soros against the British pound lends itself easily to this fantasy, but most of us are involved in retail Forex and this level or risk and profit potential is simply not realistic for us.
That does not mean that there is not great opportunity to profit. But profiting requires astute money management and using our own funds and our leverage wisely. Here are some basic principles of Forex money management.
Risk No More Than 2-5% Per Trade
Doing this prevents you from wiping your entire account on one bad trade. When you resolve to see your Forex trading as an undertaking whose success or failure will be determined in the long term, you will forget those visions of easy money and fast riches and begin toward the true path of success. Some traders recommend risking no more than 2% per trade, while others advocate a 5% rule. The actual percentage you use depends on your own personal risk appetite and the amount of capital you can afford to lose.
Have an Exit Point in Mind When You Open a Trade
The saying “begin with the end in mind” applies to Forex money management. When you have an exit mapped out in your mind, your only worry will be executing it correctly in accordance with your plan. If you don’t have an exit point in mind, you may stall and stay in trades longer than you should, losing more money in chasing lost pips in a bad trade. Always have an exit point in mind and remain steadfast in enforcing it.
Set Your Stop-Loss Every Time You Open a Trade
It doesn’t take long for a trade to go bad, especially if there is a significant news event. Unless you plan to stay up all night monitoring your positions, you will need to sleep sometime. That’s why you should always put a stop-loss in place when you open any trade.
You never know when the market will turn against you and wipe out a huge portion of your account. This principle goes along with being willing to admit that you’re wrong. There is a price in the market where your trade is obviously wrong. You must find these points and set them up as soon as you take a position in the market.
Walk Away When You’ve Had a Bad Day
Step away from the terminal when you’ve suffered bad losses. Some traders set a limit and step away when they’ve lost that amount. Some days are simply not good for trading.
We can be overemotional, lack concentration, or simply be off our game. We must admit this when it happens, accept it, and turn off our terminals and trading apps. We’re only human and when we are prone to make mistakes, trying to power through can make things worse.
Money management in Forex can be condensed into two principles: 1) we are only human; and 2) slow and steady wins the race. We must admit that we can be wrong and that our ultimate success depends upon the long-term success of high-probably trading, not being right each and every time.
Getting out of bad trades is just as crucial to success in Forex trading as getting in and staying in good ones. The more money you lose on a bad trade, the more time and effort must be expended to recover it. We must accept and account for our human frailties when it comes to trading and create a systematic approach that takes our emotions off the table.