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 definite strategy. Then, once you begin trading it is equally vital that you manage the funds available for trading with great care.
In addition to knowing which currency pairs to trade and being able to recognize entry and exit signals to trading, the successful Forex trader must be able to manage his resources and to incorporate money management into any trading plan.
There are numerous different strategies that can be applied to money management, but the majority of them will require you to keep a track of what is known as your core equity. Your core equity is the sum that you begin trading with less the money that you have in any open positions. In other words, if you begin trading with $15,000 and have $1,500 in open positions then your core equity is $13,500.
As a general rule, when starting out you should try to limit your risk to 1% to 3% of each trade. This means that if you are trading a standard Forex lot of $100,000 you should keep your risk to $1,000 to $3,000 and, for safety, should probably start at just $1,000. You can achieve this by putting a stop loss order 100 pips (1 pip = $10) above or below the position at you enter a trade.
Naturally over time your core equity will move up or down and you can merely adjust the dollar amount of your risk. Looking at our example above, with a starting 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. So, if trading is going in your favor and you make a profit of $5,000 your core equity will rise to $20,000 and you could raise your risk to $2,000 per transaction. Alternatively, you could also decide to risk more from any profit made than you would be prepared to risk from your original starting capital. You could, 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 factors and one very important part of your trading strategy lies in your ability to tightly control and manage the money that you have available for trading.
In addition to knowing which currency pairs to trade and being able to recognize entry and exit signals to trading, the successful Forex trader must be able to manage his resources and to incorporate money management into any trading plan.
There are numerous different strategies that can be applied to money management, but the majority of them will require you to keep a track of what is known as your core equity. Your core equity is the sum that you begin trading with less the money that you have in any open positions. In other words, if you begin trading with $15,000 and have $1,500 in open positions then your core equity is $13,500.
As a general rule, when starting out you should try to limit your risk to 1% to 3% of each trade. This means that if you are trading a standard Forex lot of $100,000 you should keep your risk to $1,000 to $3,000 and, for safety, should probably start at just $1,000. You can achieve this by putting a stop loss order 100 pips (1 pip = $10) above or below the position at you enter a trade.
Naturally over time your core equity will move up or down and you can merely adjust the dollar amount of your risk. Looking at our example above, with a starting 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. So, if trading is going in your favor and you make a profit of $5,000 your core equity will rise to $20,000 and you could raise your risk to $2,000 per transaction. Alternatively, you could also decide to risk more from any profit made than you would be prepared to risk from your original starting capital. You could, 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 factors and one very important part of your trading strategy lies in your ability to tightly control and manage the money that you have available for trading.
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