Money Management and Online Forex Trading
Both beginners and veteran forex traders have always been finding it difficult to manage their money in Forex trading. It is possible for anyone to land a profitable trading system, but it is not possible for everyone to maintain money management through proper discipline and strategy. Even though it is quite essential to manage money, it is something that is not quite difficult.
There are different stages and aspects associated with Forex money management, and it is important to start it from the initial phase of your forex trading business that starts with opening a live trading account. The simple rule that needs to be followed here is not to put more than 2% of your money at risk. Generally, it is believed that this rule is not applicable in the beginning, but the fact is entirely the reverse. This needs to be taken into account even when a live account has not yet been opened.
Take it for an example that you have traded sufficiently through a demo account and practiced a lot, and you are ready to deal through a live account with a saving of more than $15,000. Will you be opening an account with your entire saving? It is possible, but what would be your situation if you are to lose all of your savings? Consider that your broker goes bankrupt, and is not able to pay back your money. Or, by mistake you have taken a lots position of 15 and didn’t remember to fix the stop loss. For 100 pips it works against you and you account gets wiped out.
This would certainly put you in a fix, and you may not be able to start again. Probably for a long time, until you are able to save a lot. This failure at the start may also leave a bad effect and refrain you from engaging in forex trading. This would mean that you have lost a good opportunity.
When you have $15,000 as the money in your pocket, it is wise to open an account with $300. It should be more so when it is your first account. If you have practiced enough and are of the opinion that you have the ability to trade carefully, then you can take your starting account to $1,000.Hence, it is crucial that you start money management much before you start live trading – from the very moment you open a live account.
The next phase begins when you are looking to get the leverage of the account. It is possible to have a leverage as high as 1:500, but it should be known that even veterans take care not to have this much of it. A leverage of 1:200 is adequate. This article is related to money management, but still it is worth shedding a little light on this aspect of forex trading. Leverage is the control that you get from your broker. Here, you are able to manage a larger amount of money with the help of a smaller amount.
For instance, in case you get an account with a 1:1 leverage, it is required to have $50,000 in your account when you want to purchase $50,000 against the Pound. And, when you have an account with a leverage of 1:100, you can buy $50,000 with just $500.
At this point, you would ponder that why it is not good to have a high leverage such as 1:500. The reason is that this would mean that you are able to trade a big amount of money, but if the trading doesn’t go well, all of your money will be lost. For example, when you have a leverage of 1:500 and you have $500 account, and you are buying $100,000 against the Pound and you have 40 pips gone against you, then you are losing all of your money plus there is no more trading for you. However, if you have leverage of 1:00, the maximum amount that you can purchase is just $20,000. You may trade the whole amount with 40 pips stop loss. And, this time you would be losing just $80 against the whole $400 that you would lose in the case of trading with a leverage of 1:500. In this case, you would be losing just 2% of your total amount.
The next stage where money management needs to be considered is when taking a position. The same concept applies here – don’t put more than 2% on risk. And, this rule is also applicable to the positions that you take. You need to know that this phase is the most crucial of the money management steps, and it is not at all difficult to apply it. It is important that you don’t ignore this. It is important to consider how to trade in a situation where not more than 2% of your money can be risked.
But, before you learn how to trade with this much amount, it is important to understand another aspect – Stop Loss. It should be known clearly in your mind that if you are not able to fix your stop loss, or if you don’t like to set it, or if you move it when you find that it is going to be triggered, then you must know that you are never going to be a good forex trader. In such a case, you are going to lose your money and you won’t be able to trade any longer. It would be much better for you to maintain a distance from the forex market in case you are one of those individuals who can’t set a stop loss for their trades.