Forex Money Management for New Traders
There are so many things that a neophyte forex trader has to keep track off -charts, data, technical analysis- that maintaining a balanced account is often given low priority. But make no mistake about it; those who make a fortune in the market do so by prioritizing money management.
Simply put, a trader who enters a trading session without any forex money management plan will not survive the trade, let alone in the currencies market. Regardless of the size of your account, it is important to develop a plan to handle your financial resources.
There are of course, different forex money management strategies, and in the end it will depend a lot on your trading style. However, there are some general guidelines, tried and tested formulas that a neophyte trader can employ.
Of course, the first step to ensuring profitability and stability is to make sure that you only spend the money that you can afford to. While this may seem trivial, it does happen that traders often get caught up in the heat of the moemnt that they end up answering margin calls. The result? They throw a lot of money in a losing trade.
Include in your forex money management the following rule: never expend more than 3% of your account on a single trade. This may seem like a small amount, particularly if your contract is worth only a few thousand dollars, but this amount will add as you enter more trades.
Of course, part of a good forex money management strategy is keeping yourself updated on the issues that affect the currencies that you are holding. However, be sure to base your decisions on the actual data. You cannot buy or sell based on anticipated developments. Doing so might lead to financial losses.
The issues of leverage and margin calls are things that will often come in any forex money management strategy discussion. Because the higher leverage entails more profit/risk, it is important to consider the session you are getting into. As for margin calls, the rule of thumb among seasoned traders is that the moment you receive the call is the time to exit the market.
Needless to say, Stop/Loss and Limit Orders should be included in your financial plans. While your aim is to profit, it is also important to try and impose limits on yourself, so you do not end up throwing away everything you just earned.
There other things that you may want to consider. For instance, if you have a plan set up but are still somewhat unsure, you can try demo accounts and use "play" money, to see if it works. If you are still uncertain, you can always consult a broker.
For the new trader, forex money management is something that has to be learned well. It will make a world of difference, and if followed, you will be able to profit in the long run.