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5 tips for successful forex money management

Forex money management is something that many people miss in their trading. Whether it is through lack of knowledge or idleness, traders who ignore money management do so to their detriment. This is one of the main factors that differentiate a successful trader from an unsuccessful one.

What is forex money management?

Forex money management is a set of self-imposed rules successful traders follow to manage their money effectively; minimizing losses, maximizing profits, and growing the size of their trading account. Money management focuses on protecting your money.

Top tips for successful money management

To make things easier for you.. we have collected a list of top tips to help you come up with a successful system for your forex money management.

Trade only what you can afford to lose:

The most important tip for any trader. As a beginner trader.. you should only deposit what you can afford to trade with into your trading account and no more.

Forex trading is not a guaranteed money maker. Some people will end their forex trading career only having made losses. So do not risk what you cannot afford.

Quantify your risk per trade:

Once you have decided on an amount of money you want to trade with.. you need to show how much you are going to risk per trade and how you are going to gauge this. This will help determine where you will place your stop loss for each trade.

1. A fixed sum:

Many traders set their maximum risk per trade as a fixed monetary amount. 

This is a simple rule to follow. For each trade, you know exactly how much you are going to risk. If you make ten trades a day.. you know without doing much calculation, that the maximum you will risk is £5,000.

The disadvantage with this strategy is that it does not take into account any changes in trading balance. If you go on a sequence of wins and grow your account substantially.. but still stick to the same risk per trade, you could be missing out on greater returns.

On the other side.. if you lose many trades but your risk per trade remains £100.. you are risking a higher proportion of your account balance, which leads to your balance depreciating a lot more quickly.

2. A fixed percentage:

The most popular approach is to risk a fixed percentage of your account balance on each trade. And The benefit of using this way is that your risk per trade will fluctuate along with your account balance. 

The disadvantage here is that.. if you do sustain a sequence of losses, your risk per trade will get smaller and smaller along with your balance. This means that, if, and when, you begin to win trades, it will take you longer to make back your capital.

Establish your risk to reward:

Now you know how much you want to risk per trade, establish how much you are aiming to profit from that risk, and use this to help place a take profit for your trades.

This choice will be dependent on your strategy and your trading profile. A risk to reward ratio of 1:1 would mean, for example, that if your maximum acceptable loss is $100 your profit target would be $100. A ratio of 1:3, however, for the same amount of risk would give a target profit of $300.

It is accepted that a risk to reward ratio should be higher than 1:1. This is because, if you won 3 trades in a row and then lost 3 trades in a row, and your risk to reward ratio was 1:1, you would have made a total profit of £0.

Whereas, if you were trading with a risk to reward ratio of 1:2, and you had 3 wins followed by 3 losses because your profit was higher than the losses of each trade, you would still be in profit.

Respect leverage:

Leverage permits forex traders to open larger positions than their capital would otherwise allow. The trader takes money from their broker to open a leveraged position. 

This sounds like a great deal and, if used correctly, it can help become a profitable trader.

Because it allows you to access a bigger position with less money, leverage can amplify the profit of a winning trade.

Withdraw profit:

Part of forex money management is maximizing your profit. To do this, you need to look after your profit. The longer the money stays in your trading account, the more you are to trade with it and possibly lose it.

About Marketsbloom:

Markets Bloom is a trading academy consisting of former trading industry professionals. We aim to help all types of traders looking to trade in the financial markets.

By registering with us, you will gain amazing insights into common issues traders face as well as how to instantly improve your trading approach. Our team of experts will be with you every step of the way on your journey to becoming a better trader.

For more information on our services contact us.

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