1. Quantify Your Risk Capital
Many of the important aspects of money management proceed from this key value. For example, the size of your overall risk capital will be a factor determining the upper limit of your position size.
You might consider it prudent to risk no more than 2% of your overall risk capital in any one trade.
2. Avoid Trading Too Aggressively
Trading too aggressively is perhaps the biggest mistake new traders make. If a small sequence of losses would be enough to eradicate most of your risk capital, it suggests each trade has too much risk.
A way to aim for the correct level of risk is to adjust your position size to reflect the volatility of the pair you are trading. But remember that a more volatile currency demands a smaller position than a less volatile pair.
Autochartist is provided free to Admiral Markets clients and includes PowerStats. The PowerStats tool shows average pip movements in specific time frames, as well as other measures of expected volatility.
3. Be Realistic
One of the reasons that new traders are overly aggressive is because their expectations are not realistic. They think that aggressive trading will help them make a return on their investment more quickly.
However, the best traders make steady returns. Setting realistic goals and maintaining a conservative approach is the right way to start trading.
4. Admit When You Are Wrong
The golden rule of trading is to run your profits and cut your losses. It’s essential to exit quickly when there’s clear evidence that you have made a bad trade. It’s a natural human tendency to try and turn a bad situation around, but it’s a mistake in FX trading.
Here’s why – you cannot control the market.
5. Prepare for the Worst
We cannot know the future of a market, but we have plenty of evidence of the past. What has happened before may not be repeated, but it does show what is possible. Therefore, it’s important to look at the history of the currency pair you are trading.
Think about what action you would need to take to protect yourself if a bad scenario were to happen again. Do not underestimate the chances of price shocks occurring – you should have a plan for such a scenario.
You don’t have to delve far into the past to find examples of price shocks. In January 2015, the Swiss franc surged roughly 30% against the euro in a matter of minutes.
6. Envisage Exit Points Before Entering a Position
Think about what levels you are aiming for on the upside and what loss is sensible to withstand on the downside. Doing so will help you to maintain your discipline in the heat of the trade. It will also encourage you to think in terms of risk versus reward.
7. Use Some Form of Stop
Stops help to cut losses and are especially useful when you are not able to monitor the market. At the very least, you should use a mental stop if you don’t want to use an actual order in the market. Price alerts are also useful.
8. Don’t Trade on Tilt
At some point, you may suffer a bad loss or burn through a substantial portion of your risk capital. There is a temptation after a big loss to try and get your investment back with the next trade.
But here’s a problem. Increasing your risk when your risk capital has been stressed, is the worst time to do it.
Instead, consider reducing your trading size in a losing streak or taking a break until you can identify a high-probability trade. Always stay on an even keel, both emotionally and in terms of your position sizes.
9. Respect and Understand Leverage
Leverage offers the opportunity to magnify profits made from the risk capital you have available, but it also increases the potential for risk. It’s a useful tool, but it is very important to understand the size of your overall exposure.
10: Think Long-Term
It stands to reason that the success or failure of a trading system, will be determined by its performance in the long term. So be wary of apportioning too much importance to the success or failure of your current trade. Do not bend or ignore the rules of your system to make your current trade work.
Money management tips for Forex trading
Like all aspects of trading, what works best will vary according to the preference of the individual.
Some traders are willing to tolerate more risk than others. But if you are a beginner trader, then no matter who you are, a robust tip is to start conservatively.
We recommend practicing new strategies, in a risk-free environment, with a free Demo trading account.