4 Useful Tips on Foreign Exchange Money Management – Forex Rate It!
A prerequisite for profitable foreign exchange trading, proper money management ensures that you never run out of your trading capital. In money management, keeping your capital safe is considered more important than making big profits. Hence, before making a decision, traders must ask themselves whether the move will protect or damage their trading capital.
Here are some tips on foreign exchange money management to help maximize returns and limit losses:
The golden rule is to never risk more than 3% of your capital with each trade. While 1% is the ideal risk level, you can increase it to 3% if you are sure of your trading system. With 1% risk, losses are minimal (even if the trader loses 20 times) and recovery is faster. However, any risk more than 3% is a road to disaster, bringing you irreparable losses. For instance, if $100,000 is your account size, you must have stop loss at a point so that you do not lose over $1000 on a single trade. To keep their losses to the minimum, forex traders must be disciplined enough to follow the 1% risk level. With proper money management, traders make optimal profits with minimal risk. This is especially important for first time traders, who should use only their speculative capital (the money that they can afford to lose) for trading. Besides, it is also important never to let emotions overpower your decisions.
Another important money management tip is to set up high rewards to risk ratio. For instance, if a trade offers the potential of three times the amount risked, it may be considered a good trade (it has a 3:1 reward to risk ratio).
Diversify your trades between currencies that have little correlation. This will help reduce the risk associated with every trade.
To reduce losses, foreign exchange traders must follow the anti-martingale strategy. This is the strategy of increasing your risk when winning and decreasing the risk when losing. That is, traders must change their positions as per their new gains or losses. The martingale rule, however, is followed in gambling, where players increase their risk with every losing move (assuming that the next move will be winning and will help them recover the earlier losses), leading to faster depletion of their accounts.
With these effective foreign exchange money management tips, traders enhance their prospects of increasing their profits and reducing losses.
Autotrade the FOREX market like never before!Let ZuluTrade drive trades by specialists into your FX account FOR FREE. |
