How To Do Money Management In Trading

Money management is necessary for a successful forex trading career, especially if you're dealing with a small amount of money. It's important to handle your money in a way that benefits your account's long-term health, as well as your long-term finances and potential profits. When you're initially starting out in forex trading, here are some pointers on how to practice proper money management.

Set a stop loss

A stop loss is an important part of any forex money management strategy. You simply cannot succeed in the long-term if you do not set a risk limit. A stop loss is necessary for protecting your cash since it prevents unexpected losses.

There comes a time in any strategy when you realize the trade isn't going to work out. Sure, you could get lucky. Successful forex trading, on the other hand, does not depend on luck. It's all about identifying areas of the market where you have a statistical advantage and trying to profit from it.

Even if a trade reaches the strategy's recommended stop loss mark, the gambler in you will want to hold on and see if you can get it out. That's not a good idea! What does it mean for your strategy if it does reverse course and turn into a profitable trade? Why bother with a strategy if you're going to rely on your "gambling" brain? For long-term success, remain with your "logical" brain and stick to the plan - make sure you set a stop loss.

Don’t move your Stop-loss

Another rule to follow is to never move your stop loss. It's easy to make wrong decisions in the heat of battle. To be able to resist this temptation, you must also have a strict stop-loss policy. When you first open your position, set them and don't move them. Always keep the big picture in mind: losing one trade shouldn't be a big deal. When that happens, you're no longer trading but are instead gambling.

Calculate your risk per trade

The risk you take on each trade is usually expressed as a percentage of your total capital. Your strategy's stop loss and take profit levels should be predetermined, or at the very least approximate. You may determine the number of pips you can expect to win or the number of pips you can expect to lose if the trade goes against you using these figures.

It's only a matter of calculating the pip cost of the trade with that information. Assume your account has a balance of $1,000. The sum of 2% of $1,000 is $20. This is the maximum amount of capital you can lose per trade if your risk per deal is 2% of your account.

Avoid Overtrading

Taking up too much risk by trading too much is a common phenomenon. Especially if you're making the transition from part-time to full-time trading, trading in a different timeframe than usual, or trying out a new strategy. When the dynamics change, it's easy to become confused. Set a strict limit on how much of your capital is at risk to avoid this. You can avoid this by just risking 2% of your account on each trade, or by grouping or linked trades.

When opening a trade, reward-to-risk ratios should also be taken into account. Any trading method you apply should assist in the identification of a probable take-profit and stop-loss point. The trade is then worthwhile. However, if the take-profit gives you 15 pips and the stop-loss gives you 10 pips, the difference is merely 1.5. It's better to avoid trades with a reward-to-risk ratio of less than 3:1. Consider selecting a smaller position size to control risk if you opt to open positions with a reward-to-risk ratio of 2:1.