Forex trading is for the smart people. Being smart doesn’t just mean knowing the forex pairs to invest in, it’s also about managing your finances better.
Better financial management could lead to a larger capital, and in turn, better investments with chances of higher ROI – just what you are looking for.
The Forex market is 12 times bigger than the futures market which is indicative of how far it has expanded.
If you are a part of the Forex market, you should know that you need to be careful with your capital. You will get numerous trading opportunities and that could mean you would want to invest just that little bit more. However, that also means increased chances of losing money when you make bad decisions. You cannot have a leverage ratio of more than 20:1 if you are a beginner, for instance, it would be too much of a gamble. Ideally, you should increase your leverage ratio gradually, and keep it at 10:1 in the beginning.
The Top 7 Tips to Help You In Your Money Management
Managing your money well is one of the best ways to maximise your profit. It might feel like a lot of work, but the truth is money management can be easy too. Just follow these tips:
Do not trade with anything other than the risk capital:
Forex trading can be a risky venture no matter how you skilled you are. The free-floating currency market makes it impossible for anyone to make certain predictions. They can’t tell how a trade is going to turn out and who is going to profit from it. It is like gambling, and hence you should never put essential funds at risk over Forex. If you have set aside money for basic needs, do not put it towards your Forex capital.
It is best if you set aside money for your trade and call it the risk capital. That would be the capital you consider expendable. It does not affect the essentials of your life.
Do not use a lot of leverage:
The Forex market is all about exchanging currencies. It means that you would need equal value exchange of both the currencies involved. Theoretically, you will not need any money at first because the process does not involve any sale of commodities.
However, online forex brokers like to lure clients with leverage ratios. To take advantage of this feature, you must put your own money up as collateral against any future losses. The leverage can prove to be great if you win a trade, but it can also prove to be disastrous for your account if you lose badly. You must walk down the middle path and keep your finances in mind so that you do not have to go through severe losses.
Increase your profits by reducing losses:
This might sound a tad bit confusing to beginners, but the mathematics behind this tip is solid. You might be earning huge profits by taking multiple risks, but that will break even if you suffer equally bad losses. First, you must learn to manage your risks efficiently with the help of stop losses. Once you master risk management, there will be no stopping you. You must also let your profits accumulate with the help of trading stops.
If you can start practising these two strategies today, you will notice a difference in your trading results very soon.
Do not take a lot of heat on yourself:
When you are taking a risk, you must be comfortable with both the positive and negative outcomes of the trade. You have to acknowledge to yourself that trade can work out well or end unexpectedly, when you are taking the risk. The heat factor refers to your comfort level after having taken the risk on any given position.
If you find that you cannot sleep because you are plagued with worry about your Forex trades, here is the thing. The chances are that you are taking on more heat than you can take. Taking positions that are less risky and being able to manage your trades easily will not make you a bad trader.
Do not be controlled by your greed for money:
The thirst to do better is necessary no matter what profession you are in. However, be motivated to win more trades and improve your reputation instead of focusing solely on the prospect of more money.
If you let your greed control trading decisions, then you might end up making rash decisions that will have a negative impact on your career. You might end up overtrading or taking unnecessary risks. Having a fixed trading plan will help you curb your greed. Appropriate safeguards can prevent you from making a regrettable mistake just to satiate your greed.
Do not let expectations get the better of you:
No. You will not get rich in the course of one night no matter how you skilled you are at trading. Nurturing unrealistic expectations will end up hurting you. You will be creating a lot of negative emotions that can impact your future decisions. Try to stay informed about market decisions, so you do not suffer from any misconceptions.
Always read up on financial news and join Forex forums, so you are one step ahead of market changes. Being disappointed time and again might make you lose your love for trading altogether.
Adjust the position size:
Make sure that you do so whenever you are trying to organise a trade. There are special position size calculators available to help you. They are usually incorporated in the trading software or in online websites. You can even calculate the position on your own by making the requisite changes to your charts.
Forex or Foreign Exchange has quickly risen to become is the most popular market in the world. What makes it accessible is that it works for 24 hours every day. Moreover, it also happens to be the most liquid market available for trading.
Now that you know how to become an expert at money management, it should be easier for you. The moment you let loose, you will find that your money has gone to waste. Always remember that it is your hard earned money you are trading with. It will motivate you to be a better manager.