The Novice Forex Trader Needs To Manage His Money Carefully

By Author: Donald Saunders
Total Articles: 84
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Before you begin to trade on the foreign currency market it is crucial that you make time to study the currency markets and that you begin your Forex trading with a clear philosophy and a defined strategy. Then, once you begin trading it is equally vital that you manage your trading funds with the greatest of care.

As well as knowing which currency pairs to trade and having the ability to recognize entry and exit signals for trading, the successful Forex trader has to be able to manage his financial resources and to incorporate money management into his trading plan.

There are a number of different strategies that can be applied when it comes to money management, but the majority of them will require you to keep a track of your core equity. Your core equity is defined as the sum that you begin trading with less the money that you have in any open positions. So, if you begin trading with $15,000 and have $1,500 in open positions then your core equity is $13,500.

In general, when you first start out you should try to limit your risk to 1% to 3% of every. Thus if you are trading a standard Forex lot of $100,000 ...
... you should limit your risk to $1,000 to $3,000 and, to keep yourself safe, should ideally start at just $1,000. You can achieve this by putting a stop loss order 100 pips (where 1 pip = $10) above or below the position at you enter a trade.

Of course over time your core equity will rise or fall and you can simply adjust the dollar amount of your risk. Taking our example above, with an opening balance of $15,000 and one open position, your core equity is $13,500. If you then open a second position, your core equity will drop to $12,000 and you should limit your risk accordingly.

On the same basis, as your core equity increasesrises, you can also raise your level of risk. Consquently, if trading is going well and you have made a profit of $5,000 your core equity is now $20,000 and you could raise your risk to $2,000 per transaction. Alternatively, you might also decide that you are going to risk more from any profit made than you would be prepared to risk from your original opening capital. You might, for example, decide to risk up to 5% of any realized profits ($5,000 on a standard $100,000 lot) to give yourself a higher profit potential.

The secret to success in Forex trading relies on many different factors and one extremely important part of your trading strategy lies in your ability to manage and control the money that you have available for trading.