The currency pair market is known for its volatility. It entails a higher risk of loss with currency as a trading instrument.
Good management of your capital is therefore essential to optimize your gains and limit losses. Consequently, we recommend that you always have in mind wise Forex money management if you are interested in this market, whether you are a rookie or a seasoned investor.
This guide will round up important things you need to know about forex money management to help you trade well in the forex market.
Forex Money Management Strategy
To begin with, we get right to the heart of the matter by presenting you with an effective Forex Money Management Strategy that is easy to apply, even for beginners. It involves following a series of rules to determine how much to invest or when to close positions.
Here are the rules to follow to manage your money well:
Invest an amount adapted to your level in trading
It is essential to remember that the greater the amount invested, the greater the losses can be. The chances of making speculative mistakes are, however, higher when you are starting out.
That’s why it’s highly advisable to choose the amount of your investment according to your level of trading.
Besides, you must take into account your budget when determining the amount of the sum to invest. It is strongly advised not to invest all of your savings because of the risk of loss which is never zero, even if you are a professional trader. Only trade with the amount you can afford to lose.
Choosing reliable broker
It may sound unrelated, but in fact, choosing the regulated Forex broker makes part of the risk management. Only well-known, reputable brokers guarantee the safety of your trade, no matter the amount you are aiming to invest.
Besides having in mind your starting capital and level of trading knowledge, choose the one that suits you best. Also, as a beginner, you should prioritize those offering demo accounts.
Calculate your risk ratio
To do your forex money management properly, you have to define the risk percentage of the invested capital.
Supposing you want to invest € 1,000 in the EUR / USD currency pair. Now you need to define the maximum amount of losses you are willing to take on the trade, also known as Stop Loss. Your position will therefore be automatically closed when it is reached. For this, you must consider many Forex indicators, such as the moving average or the charts.
Experts recommend a maximum loss per trade of 2-3% of the amount placed if you are new to the business. In our example, if we choose a Stop Loss of 3%, it would be a maximum loss of € 30 on this position.
Choosing the Right Leverage for Your Trading Level
The choice of leverage is also an important element in forex money management. This system effectively multiplies your wins but also your losses. It is, therefore, crucial to choose it carefully, especially if you are new to the field. Various trading platforms offer different leverage. Using leverage means you can take a larger trading position.