What is Money Management in Forex Trading

You might think that money management is easy to implement and should not be prioritized, wait until you lose big time in Forex trading. By that time, you will realize how important it is to have a money management plan. How you should manage your funds and invest wisely is very important in trading. Discipline is necessary to implement money management. The same goes in currency trading – discipline is needed to perform your tasks accordingly and make better trading decisions.

Having basic knowledge is necessary for your long-time gains. Inexperienced traders who also do not have this basic trading knowledge will only end up losing money. Once you neglect the principles of money management, you will start to trade emotionally and the risk in trading increases. Remember that the currency exchange is volatile and inherent risks endanger your funds. Always be prepared when you enter the market.

Understanding Money Management

Before you enter the FX market, a thorough understanding of the risks and the situations that you may encounter paves the way to profitable trading. Knowing all about leverage and how to handle the risks involved in it helps to generate a good trading experience. There are a few principles that must be considered before your start trading.

  • Know more about position sizing
  • Know your trading risks
  • Evaluate the trading risks
  • Create a solution that will reduce the trading risks
  • Constantly apply the solutions to your trades

Risk Reward Ratio With The Use of Stop Loss

After practicing from a demo account, you might feel like you are ready to start a trade. The first thing to do is to open a live account with your broker. You will also need to fund your account and this will serve as your capital for trading. Having a risk-reward ratio and risk management tools like trailing stops and stop-loss promotes a safer trading environment.

Stop Loss

This risk management tool is considered the standard method being used when it comes to limiting the losses in Forex trading, particularly on volatile markets. When you place a stop-loss order, you have to consider the maximum loss that your account is willing to absorb. The most recommended percentage would be 1-2% of the funds in their account. This tool also works directly once the last value is triggered. The stop loss will automatically close the position which will prevent the trader from accumulating losses.

Trailing Stop

Traders get more advantages in trailing stop than stop loss. Additionally, it is more flexible and also provides protection on the funds in your account whenever there is a drop in price in the traded instrument. One advantage of a trailing stop is that, when a price increases, the trailing feature of the tool will be activated, which provides a safeguard on the capital. It protects not just the trading balance but the profits that are available in the ongoing trade. Stop loss and trailing stop are common risk management tools that you can’t afford to miss when opening a trade.

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