Forex Money Management
One of the most important elements of Forex trading strategy is money management. When you know how to manage your money and risk you can reduce your loses and maximize your profits on the Forex market. The first rule of money management in Forex is not to invest more money than you can afford to lose. However, money management goes deeper than that.
The more money you lose on the Forex market the harder it is to earn back your losses. Therefore, it is important to only risk a small portion of your trading bankroll at a time. You can set stop loss limits for yourself-setting a specific time that you will sell when you are down to avoid the risk of losing even more money. There are a number of different ways that Forex traders set stops to manage their money and reduce losses.
The simplest stop loss method is the equity stop. With the equity stop a trader risks only a small percentage of their bankroll at a time. For instance, if a trader had $100,000 invested they may set a 2% risk and once they lost 2% of their total investment, or $2,000 they would sell to avoid further losses. In the grand scheme of things, a $2,000 loss is not good but it is a lot better than the bigger loss that could have resulted if the trader left their money in.
Some traders choose to set chart stops, which are based on the upswings and downswings of the price action on the charts. With volatility stops, traders set stops based on how volatile the market is.
As there are a number of different money management methods in the world of Forex you’ll have to try them out to figure out which one is best for you. You can always practice with a demo account using fake money.
