Poor money management is one of the factors behind the failure of most Forex traders. If you’re not convinced, just look at how much time is spent by both experts and beginners on this topic. Experts cite money management as the virtue that any investor needs to succeed in the Forex market. Some beginners talk about how they lost money when they overlooked this important aspect of Forex trading.
What exactly is money management in the context of currency trading? It is controlling the flow of money in and out of trade with the foremost objective of minimizing your exposure to risk. Poor management, therefore, essentially implies betting with your investment and exposing it to greater risk. Many investors often forget that this is a very important part of a system or strategy.
Trade with the preservation of your capital as your primary concern; otherwise you will not succeed in the foreign exchange market. It makes sense without being complicated - risk only a tiny proportion of your total account so that you have enough money to use for other trades in case of financial loss. Simply put, it is true to the adage “don’t put all your eggs in one basket” or you may lose everything or nearly all of what you have. Some suggest a maximum of five percent per trade while others recommend a little below or higher than this.
Trade Safely With a Small Percentage of the Capital
These are three tried and tested approaches to balancing your money in Forex trading:
Have a Healthy Risk to Reward Ratio
Your prospects for losses should be smaller than your chances for profits; otherwise, do not trade. Do not consider selling nor buying as an choice. Preferably, you should have a risk-to-reward ratio of 1:2 or as high as 1:3. In the long term, you will benefit from not risking more than you can potentially make because it will significantly further your chances for stable profitability.
Let your profits run, cut your losses short
Some traders lose more money than they should as a consequence of “waiting for the economy to turn back around.” Get out of a trade while your losses are still small. If you’re getting profits, don’t be consumed by greed and close the trade right away. Many traders recognize that by getting out early in the game (as soon as they make money) they could lose the chance to make much more money if they stayed.
May Your Profits Rise
Henk
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