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 steadies near 1.1750 ahead of final Eurozone CPI amid fading USD recovery
The EUR/USD pair steadies around the 1.1750 area during the Asian session on Wednesday, and for now, seems to have stalled the previous day's sharp retracement slide from the highest level since September 24. Meanwhile, the fundamental backdrop remains tilted in favor of bullish traders and suggests that the path of least resistance for spot prices remains to the upside.
GBP/USD gains ground above 1.3400 on UK PMI optimism
The GBP/USD pair gains momentum to around 1.3425 during the early Asian session on Wednesday. The Pound Sterling edges higher against the Greenback on the upbeat UK preliminary S&P Global Purchasing Managers' Index data. Traders will take more cues from the Fedspeak later on Wednesday.
USD/JPY bounces to 155.00 as Japanese Yen sees pre-BoJ profit taking
USD/JPY is back on the bids, retaking 150.00 in the Asian session on Wednesday. The Japanese Yen sees fresh declines on profit-taking ahead of Friday's BoJ event risk, while the US Dollar recovers following the mixed US jobs data-led sell-off. Fedspeak awaited.
Editors’ Picks
AUD/USD consolidates near weekly lows below 0.6650
AUD/USD trades with a negative bias for the fifth straight day early Wednesday, close to weekly lows below 0.6650. A softer risk tone, China's economic woes and a broad US Dollar bounce undermine the Aussie. However, the downside appears cushioned by the hawkish RBA outlook and commodities' uptick.
USD/JPY bounces to 155.00 as Japanese Yen sees pre-BoJ profit taking
USD/JPY is back on the bids, retaking 150.00 in the Asian session on Wednesday. The Japanese Yen sees fresh declines on profit-taking ahead of Friday's BoJ event risk, while the US Dollar recovers following the mixed US jobs data-led sell-off. Fedspeak awaited.
Gold advances to near seven-week highs amid US labor market cooling
Gold price extends its upside to near seven-week highs above $4,300 during the Asian trading hours on Wednesday. The precious metal gains momentum as the US labor market remains relatively resilient but shows signs of slowing. The mixed US employment report for November reinforces bets of further rate cuts by the US Federal Reserve and weighs on the US Dollar.
WTI climbs above $55.50 as Trump orders blockade of sanctioned Venezuelan oil tankers
West Texas Intermediate, the US crude oil benchmark, is trading around $55.75 during the Asian trading hours on Wednesday. The WTI price climbs amid rising volatility around Latin American crude supply. Traders await the release of the Energy Information Administration crude oil stockpiles report later on Wednesday.
Ukraine-Russia in the spotlight once again
Since the start of the week, gold’s price has moved lower, but has yet to erase the gains made last week. In today’s report we intend to focus on the newest round of peace talks between Russia and Ukraine, whilst noting the release of the US Employment data later on day and end our report with an update in regards to the tensions brewing in Venezuela.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
I’m often mystified in my educational forex articles why so many traders struggle to make consistent money out of forex trading. The answer has more to do with what they don’t know than what they do know. After working in investment banks for 20 years many of which were as a Chief trader its second knowledge how to extract cash out of the market.
5 Forex News Events You Need To Know
In the fast moving world of currency markets where huge moves can seemingly come from nowhere, it is extremely important for new traders to learn about the various economic indicators and forex news events and releases that shape the markets. Indeed, quickly getting a handle on which data to look out for, what it means, and how to trade it can see new traders quickly become far more profitable and sets up the road to long term success.
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and selling pressure. Chart patterns have a proven track-record, and traders use them to identify continuation or reversal signals, to open positions and identify price targets.
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.
The challenge: Timing the market and trader psychology
Successful trading often comes down to timing – entering and exiting trades at the right moments. Yet timing the market is notoriously difficult, largely because human psychology can derail even the best plans. Two powerful emotions in particular – fear and greed – tend to drive trading decisions off course.