The Importance Of Money Management In Forex Trading
As a Forex trader, knowing how much of your capital to risk on each trade you place is an essential part of your Forex trading strategy. A simple position size calculator can compute the position size you should set for a given trade, based on account balance, value of individual currencies being traded, and your risk appetite. For money management in Forex, this is vital to getting started. Unless properly managed, you’ll blow up your Forex account very quickly! Trading is not gambling. If you do it right, it won’t be.
The standard suggestion is risking anywhere between 1-3 % of your account. 1% is really best to begin with. Then there is the matter of determining how many open positions can you have without reducing your margin significantly, upon draw-downs. The calculator will tell you that, too.
Knowing how many positions you can safely open, will also depend on the particular leverage amount set for your trading account. A great website for learning all about money management is BabyPips.com. See their position size calculator here. Another valuable resource that covers all things money management can be found on this site.
The Advantage Of Leverage, For Higher Profits
U.S. brokers offer the max of 50:1 leverage, while most off shore brokers offer leverage of up to 1000:1. In order to be sufficiently profitable with a 50:1 leveraged account, you need a sizable deposit to begin with. Most new traders shouldn’t risk too much in the beginning, either way.
The recommendation is to start out with the broker minimum, for funding a micro account. If you want to maximize your trading results as a U.S resident/trader, I suggest opening an account with an over-seas broker. There are a handful of reputable and regulated offshore brokers that accept U.S. traders. That way, you can start building up an account with as little as 500$ using up to 1000:1 leverage.
Before opening up a live account, most brokers allow you to download their trading platform where you can practice placing trades on a demo account. It is in every way identical to a live account, except you are trading ‘paper money’. This way you can practice placing trades, learn the trading platform, & the tools available to you, to see how it all works, without even opening a real money account yet.
Below is a screenshot of what your trading platform will look like (Meta-trader 4). This is the most commonly used trading platform by traders worldwide, and the easiest to use. You will need a bit of time to ‘learn the platform’.
Choosing A Broker For Best Trading Results
Contact their customer service and ask questions, to see how prompt and helpful they are. A few good overseas brokers that accept U.S. traders that I know of, are Finpro, and LMFX. I personally have an account with LMFX for over 2 years now, and have had no issues with them. They have a 1000:1 max leverage, which is outstanding, for generating higher profits.
If you want to do some research, there is a site called Babypips.com that reviews brokers, trading systems, etc. You will see mixed reviews for all brokers out there, but I would focus on the recommended, top brokers as reported by traders who use them.
Watching Out For Typical Newbie Mistakes – Don’t Be A Hater!
Over the years, I’ve seen that there are many people who jump into trading with no experience, no patience, and end up blowing their account quickly, mostly due to bad risk management. They become very angry, and then want to blame the broker, or literally anything else on the planet, for their failure! Most traders have blown an account or two in the beginning, it happens, but no need to cry over it (maybe for a minute or two) but then it’s time to roll up your sleeves and really get to work.
This always happens when you lack a proven trading strategy you stick with, and, you don’t practice good money management. You will see a lot of reviews that ‘reflect’ that anger from inexperienced traders, who blame the broker. That’s not to say there aren’t shady brokers, but that’s why you need to perform a bit of due diligence first. A few things to look for: age of broker, are they regulated at all? can you find legitimate reviews for that broker? And remember, no broker will have all good reviews!
However, if you want to play it COMPLETELY safe as a U.S. trader, sign up with one of the reputable U.S. Forex brokers, like Forex.com, or Oanda who are regulated up the wazoo. You will still make money, but instead of making say, $100 on a given trade using, for example, 200:1 leverage, you’d only make $25 on the same trade, using 50:1 leverage which is the max allowed for U.S. brokers.
Playing It Safe – Taking Only The Best Trades Thus Preserving Your Capital!
The bottom line is, you want to preserve your trading capital, so starting out with a 1% risk is a good idea, and, strictly following the rules of your trade plan, as you’ve established it. This way you can survive multiple draw downs of the market going against you, before it moves towards your target. And you can take losses while still remaining profitable.
As your account grows, you will be adding to your lot sizes, this way it becomes a compounding machine relative to your profits. This is why trading is awesome, instead of a static, or simply puny return, you are constantly compounding, and it’s pretty phenomenal how much your account can grow in a year, based on compounding. In Forex, you can realistically achieve this type of growth.
There are many trading systems out there, and so, for you Forex newbies, you need to decide, do I want to really learn Forex from the ground up and develop my own trading strategy? If so, understand it is going to take some time. Don’t quit your day job.
A second option is, to buy some kind of software that will show you where to enter the market, while continuing to learn the basics of Forex on your own. It will still take time, but you can start taking trades sooner, with software that gives you trade entries.
There are lots of ‘add on’ indicators & software that traders can use, for finding accurate entries into the market. One software that signals the beginning of new trends, is called Forex Trendy. It identifies early entries into the market, where a new trend is forming. Believe me, that is half the battle right there. The other one being, (you guessed it)….risk management.
Doing It Right – Being Disciplined And Calm!
Forex trading can generate amazing returns for traders, but at the same time, one needs to be very grounded and focused so the ‘usual’ mistakes aren’t made. It isn’t really necessary to blow up an account and learn the hard way, about risk management.
I would strongly suggest taking a trading course! You can ‘do it yourself’ at Babypips.com or, you can get a full support, paid training course, at a reasonable price, where you also receive trade entries. Here is one that I highly recommend, created by a veteran Forex trader.
Always practice on a demo account first! So go for it, just do it the right way, ‘curb your excitement’ and get sober as a judge, because this is a BUSINESS and you have to treat it that way. Then, you’ll live to trade another day, and another!
For more tips on risk management check this out. Questions or comments? Please let me know what you think!