Isn’t money management a nice buzzword? Many forex brokers flash around this nice phrase. I’m sure you’ve heard it many times. How can you turn this buzzword into practical, actionable advice?
As with any type of investment, there is risk. The idea is to control your risk and be aware of it. This will save you from the infamous margin call, as well as let you control your account in a better way.
1. Limit the risk: When you open a trade, place a stop loss order to get you out of your trade and prevent a situation where you lose too much. This states the obvious for the vast majority of traders reading this, but I still know some traders who don’t use a stop loss order. This precarious deed is done also by people who work at forex broker firms and trade with their account. Sad but true.
2. How much money are you risking: Many traders calculate the risk / reward ratio. Some look for 2:1 or 3:1. That’s great. But how many dollars are you actually risking? This data is available with most brokers. Is this sum too high? In that case, there are two mathematical options to reduce the amount of money you risk:
A rule of thumb: Don’t risk more than 2% of your account!
I know this sounds very strict, but this rule will help you survive, learn and eventually increase your chances of having sustainable profits in forex trading.
A forex demo account is very useful for practice, but it doesn’t fully simulate the real thing – not in execution (detailed later) and not in the emotional stress. Having enough opportunities to trade helps you trade better.
----
Read chapter 2
As with any type of investment, there is risk. The idea is to control your risk and be aware of it. This will save you from the infamous margin call, as well as let you control your account in a better way.
1. Limit the risk: When you open a trade, place a stop loss order to get you out of your trade and prevent a situation where you lose too much. This states the obvious for the vast majority of traders reading this, but I still know some traders who don’t use a stop loss order. This precarious deed is done also by people who work at forex broker firms and trade with their account. Sad but true.
2. How much money are you risking: Many traders calculate the risk / reward ratio. Some look for 2:1 or 3:1. That’s great. But how many dollars are you actually risking? This data is available with most brokers. Is this sum too high? In that case, there are two mathematical options to reduce the amount of money you risk:
1. Tighten your Stop Loss: In this way, less money is at risk. Sounds good? Not exactly. Perhaps your new Stop Loss is too tight and will yield an immediate loss to that position. Lowering the amount of money you risk doesn’t mean raising the chances of a loss! The stop loss point should be based on your analysis: technical, fundamental or a combination. It shouldn’t be based on the amount of money risked.
2. Lowering the position size: With a lower position size, you will still get to place the stop loss point in the right place for you, but the money that is risked will be lower. Yes, also the rewards side will be lower. And yes, it is tempting to trade large positions. But remember: this is leveraged money, not real money that you have. By lowering the position size you still get to trade your position in full, and just risk less cash.
3. How much of your account are you risking? OK, you already see the amount of dollars that you are risking, but saying it bluntly: what is your burn rate? Let’s say you have an account of $1000 and you risk 20%. Now your first trade has gone bad, and you lose $200. You stick to your method but it doesn’t work out again and you lose another $200. In 5 trades you are out, liquidated, margin-called. If you are new to forex trading, you are likely to make more mistakes and lose more in your initial trades. Risking a big portion of your account means that you can burn out quickly before you had enough time to learn, improve and win enough trades.
A rule of thumb: Don’t risk more than 2% of your account!
I know this sounds very strict, but this rule will help you survive, learn and eventually increase your chances of having sustainable profits in forex trading.
A forex demo account is very useful for practice, but it doesn’t fully simulate the real thing – not in execution (detailed later) and not in the emotional stress. Having enough opportunities to trade helps you trade better.
----
Read chapter 2
Editors’ Picks
EUR/USD advances above 1.1800 ahead of German inflation data
EUR/USD stretches higher above 1.1800 in the European session on Friday, helped by sustained US Dollar weakness. Attention now turns toward the release of the preliminary inflation data for February from Germany and its major states during the day.
GBP/USD struggles near 1.3500 amid UK political drama, BoE easing bias
GBP/USD struggles to build on the overnight modest bounce from the weekly low and oscillates in a narrow band near 1.3500 in European trading on Friday. The Gorton and Denton by-election, held on February 26, has become a focal point of political drama in the UK, along with the Bank of England (BoE) easing expectations, acts as a headwind for the British Pound and the GBP/USD pair.
USD/JPY falls back below 156.00 as Tokyo CPI backs BoJ's hawkish outlook
USD/JPY attracts fresh sellers for the second straight day following the release of Tokyo CPI, which grew slightly more than expected in February. This comes on top of hawkish comments by BoJ officials and backs the case for further policy tightening, providing a modest lift to the Japanese Yen. Apart from this, sustained safe-haven buying, amid trade-related uncertainties and geopolitical tensions, benefits the JPY's safe-haven status. However, reduced Fed rate cut bets underpin the US Dollar and could help limit losses for the currency pair.
Editors’ Picks
EUR/USD advances above 1.1800 ahead of German inflation data
EUR/USD stretches higher above 1.1800 in the European session on Friday, helped by sustained US Dollar weakness. Attention now turns toward the release of the preliminary inflation data for February from Germany and its major states during the day.
GBP/USD struggles near 1.3500 amid UK political drama, BoE easing bias
GBP/USD struggles to build on the overnight modest bounce from the weekly low and oscillates in a narrow band near 1.3500 in European trading on Friday. The Gorton and Denton by-election, held on February 26, has become a focal point of political drama in the UK, along with the Bank of England (BoE) easing expectations, acts as a headwind for the British Pound and the GBP/USD pair.
Gold flat lines below $5,200; traders look to US PPI for fresh impetus
Gold struggles to capitalize on its modest gains registered over the past two days and trades below the $5,200 mark through the first half of the European session on Friday. Geopolitical risks remain in play amid a large US naval and air power buildup in the Middle East.
Bitcoin, Ethereum and Ripple consolidate with short-term cautious bullish bias
Bitcoin, Ethereum and Ripple are consolidating near key technical areas on Friday, showing mild signs of stabilization after recent volatility. BTC holds above $67,000 despite mild losses so far this week, while ETH hovers around $2,000 after a rejection near its upper consolidation boundary.
Changing the game: International implications of recent tariff developments
The Supreme Court ruling on International Emergency Economic Powers Act (IEEPA) tariffs provides limited relief for the rest of the world, with weighted average tariff rates modestly lower.
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