Components of Money Management in Forex Trading

Investors, who have a money management system incorporated with their Forex trading plan, know how to control the money that they risk in any Forex transaction. When they get an entry signal from their trading system, they already know how much money they can invest. They usually invest in terms of percentage of their equity and they such percentage is always fixed. By risking a fixed percentage of the investor’s equity, the Forex trader gradually increases his/her wealth while winning. On the contrary, his/her wealth is gradually decreased when he/she is losing. money management

The trader’s profile is one component of a money management system. Common trader profiles include Day Trader, Swing Trader, and Position Trader. A day trader is somebody who disposes everything at the end of day. He/she also trades in high volume. The general aim of a day trader is to have a quick turnover. The swing trader, on the other hand, works on a longer time frame. The position may be held for a couple of hours or even days. For the swing trader, timing is of the essence. The position trader takes the longest time frame. He/she can hold his/her position even for years. He/she looks into interest rates, government decisions, and economic models before making trading decisions. The trader’s profile can determine what type of management system he/she has.

The lot or trade size also determines how a trader can manage his/her money. It is primarily determined by the amount of money one puts into his/her trading account. It is highly recommended that one’s trading capital be worth at least 3 campaigns of ten trades each.

Leverage is also part of management of money. Although the dealer/broker sets the maximum leverage the trader can use, the investor typically determines his/her leverage on a per-transaction basis with the account size and trade size as factors to help in determining leverage.

The aggregate equity in play, which is percentage of the account utilized for margin at a given time, is determined by the number of concurrent open trades, the trade, and the trader’s leverage. For new traders, the recommended number of open trade is two with at most half of the total equity in play.

The use of stop loss is also a component and must be in line with the money management strategy. The percentage of money the investor is willing to risk is an important factor in determining the stop loss. Once the percentage is settled, the trader must ensure that he/she doesn’t go over that percentage in any Forex transaction.

Managing the transactions while the position is on is also important in one’s managing of his/her money. The stop loss may be adjusted when the investor is profiting on the open transaction but he/she must make sure that he/she is not risking too much. Proper money management involves the discipline of learning how to stop.

 

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