Money Management in Trading
Money management is one of the most important part of building a successful investment in trading.
Money management combined with a successful trading strategy, it will enable the forex trader to eliminate the emotional and psychological aspects and to make money over the long term. A successful trader is actually a risk manager, and although we all think it is about entering a trade, managing it is far more important.
The most important reason you should have a proper money management strategy is to ensure that you can remain in the business long enough to become profitable, because when the money is gone the game is over. A good money management system can be applied to any trading method or strategy.
Most traders invest their energy and money focusing on the trading strategy and overlook the psychology of trading itself. This can be the hardest part to control, not just for new traders. But with the wright money management rules in place we can distance human emotion and will still have cash available for future trading opportunities. With that in mind, do not rush into trades, soon a new trading opportunity will come up.
The measure of your overall risk will be an important factor determining the limit of your trading position size. Never risk no more than 2% of your overall cash in any one trade.
Trading aggressively is the biggest mistake new forex traders make. If a small sequence of losses would be enough to eradicate most of your capital, it suggests each trade has too much risk. An approach to aim for the correct level of risk is to alter your position size to reflect the volatility of the currency you are trading. A more volatile currency demands a smaller portion of your portfolio than a less volatile pair.
The best traders make steady returns in the long run. These profits can become very large over the years, through the power of compounding. But you cannot get compounded returns if you quickly get out of the game. Realistic objectives and a moderate approach is the right way to start investing in foreign exchange.
One of the advantages of Forex trading, is powerful leverage ratios up to 1:1000 depending on your forex broker. Leverage allows you to command an FX position that is much larger than the capital you deposit. This offers the chance to amplify profits made from the capital you have available. But it also increases your risk exposure. In other words – it allows you to ramp up the risk to get greater profits. This is a useful tool, but it is critical to understand the size of your overall risk exposure.
Your trading strategy will be determined by its performance in the long term. Do not worry too much for the success or failure of your current trade. Trading is not just about a successful trading strategy. It’s also about staying in the business long enough to allow your strategy to succeed.
Like all aspects of trading, what works best will vary according to the preference of the individual investor. Some traders are willing to tolerate more risk than others.