10 Forex Trading Money Management Tips for Success

Forex Trading is a potentially profitable activity but also very risky. One of the resources to reduce risks is practicing good Money Management. This term refers to the discipline of planning not only potential economic gains but also potential losses, in order to have a clear view of the money being risked at all times. Money Management is a practice that a trader cannot give up. Especially because economic catastrophe is always around the corner. Just think of the most (sadly) famous statistic in Forex Trading: about 90% of traders close the year at a loss! Unfortunately, Money Management is also a difficult discipline. It requires commitment and time to be carried out at its best, as well as a considerable technical background. In this article, we will try to facilitate its implementation by offering some useful tips.

Tips for Money Management worthy of its name

The 2% rule. To be clear, it is a fairly arbitrary indication, the result of a convention rather than a mathematical calculation. However, it is a rule of common sense, which is based on the principle of prudence. It states that it is always best to invest, for each trade, no more than 2% of the entire capital. In this way, even in the worst-case scenario, it would take dozens and dozens of trades before losing (almost) all the available capital. It is a widely used rule, therefore reliable. The issue of capitalization. Forex Trading has gained some success among ordinary people due to the entry barriers, which are lower than other speculative investment activities. This is mainly thanks to the brokers that allow opening accounts with small amounts, often a few hundred euros. However, it is not recommended to operate if you have "little change" available. This is for two reasons: first, the gains are negligible; second, you are encouraged to use risky techniques to grind out profits, for example... Leverage. Some brokers advertise themselves by offering "strong" leverage as the main attraction, even if the authorities are trying to limit margin operations as much as possible. It is an attitude that, although legitimate, can mislead the less experienced trader, who may view leverage as just another tool. Well, it is a real double-edged sword, also because the risk is not only that of increasing profits but also that of exponentially increasing losses! The advice, therefore, is to use leverage that does not exceed the 1:50 ratio. The right risk-reward ratio. Here we get technical. The risk-reward ratio is the ratio between the maximum possible loss and the maximum possible gain. The first term is determined by the stop loss, the second term is determined by the take profit (although some use the more complex trailing stop). In any case, by convention, it is good to plan your trade, therefore the exit points, so that the maximum possible gain exceeds the maximum possible loss by at least two times. The more prudent, then, refer to a 1:3 ratio. The overall view. It often happens that the trader receives, or derives, strong entry signals and, nevertheless, the subsequent trade proves to be a failure. This can happen for various reasons, but the most frequent one has to do with volatility. If the market is volatile, and the signals are produced with an analysis that is too limited in terms of time, it is likely that the signal will prove to be false or misleading. Therefore, before opening a position, take an overall look and verify that the market is not in a situation of volatility. Reinvest profits. A very prudent approach to Money Management is based on a simple rule: reinvest profits. That is, given a precise period of time, always and only commit the gains and not the initial capital, regardless of the 2% rule. This is a way to decrease pressure, since you have the feeling of not risking anything, but also to preserve money. Of course, the risk is to produce returns that are too low. No to frenzy. Scalping is the prerogative of the most experienced. It's true, scalping is tempting for many. Firstly, because it promises substantial gains, secondly because it is adrenaline-pumping. However, it is also very difficult to practice. The risk of not being able to withstand the pressure and not being able to make decisions (and interpret the market) in a short time is really high. So, before opening and closing positions at a frantic pace, think twice. No to martingale. The martingale is a very famous investment method, more outside of trading than inside trading to tell the truth. It consists of investing, after a loss, exactly twice as much as was invested in the previous trade. In this way, precisely due to a mathematical question, even if you were to continue to lose large sums, once the victory arrives it would compensate for the interests of all the previous defeats. Well, the martingale goes against all the principles of Money Management and even against the principles of prudence. It is truly capable of burning capital in a handful of trades. Therefore, avoid it. Always set Stop Loss and Take Profit. Some hasty traders do not set either the Stop Loss or the Take Profit, but instead go by feel, perhaps strong with a truly in-depth market analysis. Well, it is always necessary to set these levels to limit the damage in case of a losing trade, to preserve the gains in case of a winning trade. It is not even too difficult, if you use the most basic approach, that is the one that refers to supports and resistances (often corresponding to periodic lows and highs).