The Novice Forex Trader Needs To Manage His Money Carefully

Managing your investment funds is a skill which the novice Forex trader needs to learn quickly.

Before you start trading on the Forex it is vital that you take the time to learn the ins and outs of markets and that you begin your Forex trading with a very clear philosophy and a definite strategy. Then, once you begin trading it is equally vital that you manage your trading funds with the greatest of care.

In addition to knowing which currencies you should trade and having the ability to recognize entry and exit signals to trading, the successful Forex trader must be able to manage his financial resources and to incorporate sound money management into any trading plan.

There are several different strategies that can be applied when it comes to money management, but most of them will be based upon keeping a track of what is known as your core equity. Your core equity is defined as the sum that you begin trading with less the money that you have in any open positions. In other words, if you begin trading with $15,000 and have $1,500 in open positions then your core equity is $13,500.

Generally speaking, when you first start out you should try to limit your risk to 1% to 3% of every. This means that if you are trading a standard Forex lot of $100,000 you should keep your risk to $1,000 to $3,000 and, for safety, should probably start at just $1,000. You can achieve this by putting a stop loss order 100 pips (where 1 pip = $10) above or below the position at you enter a trade.

Naturally over time your core equity will move up or down and you can simply adjust the dollar amount of your risk. Looking at our example above, with an opening balance of $15,000 and one open position, your core equity is $13,500. If you then add a second position, your core equity will drop to $12,000 and you should limit your risk accordingly.

Using the same principal, as your core equity increasesrises, you can also increase your level of risk. Consquently, if trading is going well and you make a profit of $5,000 your core equity will rise to $20,000 and you could raise your risk to $2,000 per transaction. Alternatively, you could also decide to risk more from any profit made than you would be prepared to put at risk from your original opening capital. You could, for example, risk up to 5% of any realized profits ($5,000 on a standard $100,000 lot) giving yourself a higher profit potential.

The secret to succeeding in Forex trading relies on many factors and one very important part of your trading strategy lies in your ability to tightly manage and control the money that you have available for trading.

Comments? Questions? Email Here

© HowtoAdvice.com

How to Advice .com