Money management is very important in Forex trading, for all traders and investors. Like all financial markets, trading in the Forex market is essentially gambling, as you risk your own money in order to potentially make a profit. However, if you do not manage your money correctly and on a day-to-day basis you risk too much, you will be destined for failure – no matter how skilled you are or how much experience you have, when it comes to fundamental and technical analysis.
One of the most important aspects of Forex money management involves buying and selling the right proportion of your total liquid capital. It is one of multiple tactics, that can help to minimize both your risk and your exposure, allowing for more consistent positive returns.
The bottom line to money management in Forex trading is to not trade or invest a large share of your money in any one trade or investment. This is because you will eventually and inevitably hit a stroke of bad luck. This will cause you to lose so much capital that you will not be able to trade at the same volumes as usual, because you will lack the capacity.
Stops are another important aspect of Forex trading money management. Stops also work well alongside proportionate trading and investing. The main types of Stops are: the equity stop, the volatility stop, the chart stop and the margin stop.
The equity stop is the most common type of stop. It allows traders and investors in the currency market to place sell orders at certain points below their entry points. Equity stops allow you to get out whenever you are satisfied with your earnings. They also allow you to get out early in order to avoid significant losses. You can adjust the percentage of your equity stop to match your own desired risk level.
The volatility stop is another common type of stop. It allows traders and investors in the FX market to set selling parameters, for when the market is volatile enough to become risky. The volatility stop really, is just one type of chart stop. There are hundreds and thousands of parameters that you can set to create stops.
Chart stops are any type of stop that decides when to buy or sell, using various technical indicators and combinations of various technical indicators.
The margin stop is based more on your own account than the actual market. If you are trading with leverage, you can use a margin stop by placing a margin call at any point of your account. You set this margin call as a percentage, which means that as soon as the capital you have leveraged drops below your specified percentage of its original value, you will get pulled out of the market.
In conclusion, there are two main aspects of money management in Forex trading, that are more important to traders and investors. The first one, is buying and selling the correct proportion of your total liquid capital. The second one involves the use of stops. By combining both of these money management techniques, you will be able to manage your money effectively, allowing you to continually chase profits while being protected from significant losses.