6 Forex Money Management Tips for Profitable Trading

Money Management is the element that distinguishes a conscious and profitable Forex Trading activity from mere gambling. Obviously, the differences between the two activities do not end here, but certainly Money Management is the most representative one. Incidentally, Money Management is the set of measures that allow the trader to always keep his finances under control, even in case of loss. But, how do you practice effective Money Management? Here are six useful tips in this regard.

Identify your risk per trade

As the name suggests, risk per trade is the amount of money that a trader can afford to lose in a single trade. It is a subjective element that changes from investor to investor and depends on factors such as available capital, extra-trading economic resources, and the ability to emotionally cope with losses. Knowing this variable is important because it allows the trader to set the order in a way that manages the loss and does not compromise anything even in case of loss. In short, it is a method to reduce the impact of negative events. As we have already specified, risk per trade is subjective. However, over the last few years, formulas have been developed to offer a universal version of this element, a version that everyone can take as a reference. The result of these elaborations is a number: 2. In essence, the maximum risk per single trade should never exceed 2% of one's capital. In any case, if the trader is a beginner, it would be good to halve this percentage, as the probability of defeat is greater.

Always use stop loss

Stop loss is the only guarantee that the trader has of not losing more than a certain sum of money during a single operation. If risk per trade illustrates the maximum manageable loss, stop loss ensures that the same threshold is not exceeded. It is possible to set the stop loss by knowing the maximum manageable loss, but also by referring to pivot points. This is a strategic choice that pertains to the individual trader. In general, the stop loss is set based on support and resistance levels (the pivot points), but only if these do not go beyond the risk per trade.

Use take profit

Take profit is the other side of the stop loss coin. While the latter automatically ends a trade that is causing losses beyond the tolerance threshold, take profit ends it when, according to certain estimates, the maximum possible profit has been reached. Generally, the purpose of take profit is to bring home the result before the market reverses and turns the trade from positive to negative. After all, this is also Money Management, although the context changes. The context of stop loss is negative, of minimizing losses; the context of take profit is positive, of optimizing wins. To understand where to place the take profit, in addition to referring to the classic pivot points, it is good to involve another concept, that of reward risk ratio. This is the ratio between the maximum loss and the maximum foreseeable win. If the ratio is 1:1, it means that the amount of money you are risking is identical to the amount of money you could earn. The market is not always in profitable conditions, but it is always necessary to seek a risk reward ratio greater than 1:2. In short, the game must be worth the candle.

Use leverage with caution

Leverage is a very particular tool, the classic double-edged sword. It can make the fortune of those who use it but, at the same time, it can throw them into complete despair. It can facilitate an exponential growth of profits and can throw the trader into bankruptcy. This happens because leverage is nothing more than an amplifier: it exacerbates gains as well as losses. In parentheses, leverage is the tool that allows the trader to invest more than he can actually do. If, for example, the leverage has a ratio of 1:10, the trader invests 10 euros but it is as if he invested 100. This means that if the trade is successful and realizes a 10% profit, it produces a profit of 10 euros (practically the sum invested). While, if it loses, and the percentage is the same, it produces a disastrous loss. In short, leverage should be used with caution, and in any case within the limits outlined by Money Management, and perhaps the risk per trade. The advice is not to go beyond the 1:10 ratio. In special cases, when you are particularly financially covered, you could proceed with a 1:50 or even 1:100 leverage. Risking beyond that would be too dangerous.

Don't get emotionally involved

It is very difficult not to get emotionally involved when trading. After all, you are risking real money, perhaps earned with the sweat of your own work. However, it is very damaging to invest and at the same time get carried away by emotions. The risk, in fact, is to make wrong choices, not very rational because they are driven by feelings such as fear and euphoria. If identifying the consequences of an approach dominated by fear is quite easy, it is not if referring to euphoria, which is considered by common sense as an all in all positive feeling. Well, when trading in a "euphoric state" the risks are, if possible, even greater. The danger, in fact, is to assume a gambler's attitude and set aside caution.

Keep a diary and learn from your mistakes

It is so difficult to admit that you were wrong. It is much easier, even for experienced traders, to persevere in one's beliefs rather than question oneself. Yet it must be done. On how, there is not much choice. The only way to understand one's mistakes is... Write them down. In short, a good trader should always keep a diary on which to put in black and white all his trading activities. This, in the long run, can also represent an inexhaustible source of statistical data capable of proving the correctness of one approach over another, of one strategy over another. The secret, after all, is to learn as you go, no matter how stressful, tiring, or demanding it may be.