Five Important Rules of Money Management in Forex Trading

The best safeguard against any form of loss in the Forex market is money management. If you are serious enough to put money at risk trading currency then you should be serious enough and professional enough to use solid money management techniques. A trading strategy and money management strategy makes up your total trading plan. This puts two types of protection on your account: the rules of your trading strategy and the rules of your money management strategy.

The first method of money management to incorporate into your trading is that should only trade with capital you can afford to lose. Trading currency involves significant risk and has much more in common with gambling than it does with investing in a more traditional equities market. Therefore putting funds at risk is never a smart move that a responsible trader would make. Traders do much better when they are working with risk capital, in this matter they have a much lower level of stress and are able to make much clearer decisions.

Secondly, the best advice ever given to a trader has been to cut your losses and let your profits run. Cutting your losses means placing stops in the right places according to your risk tolerance and then sticking with your original plan. When you are stopped out you are out; move on and wait for another setup to enter the market. However, when your trade moves into the money you use a trailing stop to protect what you have gained and keep from having a profitable trade turn south on you. If you are working in longer time frames you could find yourself on the beginning edge of a 100+ pip move on a consistent basis if your setups produce good signals.

Thirdly, you should avoid the use of extreme leverage. Some Forex brokers allow you to use up to 400:1 leverage and can offer the potential for huge gains, but also huge losses if not managed correctly. Being on the wrong side of a trade with a huge leverage position can completely wipe you out. In the US markets traders are limited by regulation to 50:1 on major pairs and 20:1 on minor pairs.

Fourthly, you should avoid is taking on more than you can handle. This often occurs when traders begin to over trade causing them to lose sleep and forget about other areas of their life. Getting away from the computer and trading is essential for the sanity and the quality of your trades.

The last temptation of currency trading has to do with getting greedy. Becoming greedy can lead to making poor decisions and over trading as well, especially if you have several winning trades in a row. The best way to avoid getting greedy, is to have a plan for combating this that is built into your trading plan.

In conclusion, money management is one of the most important parts of trading currency. Keeping a tight rein on your money helps you to keep the money you already have safe and the money you make in your pocket.

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