Step by Step Money Management in Forex
We all know that money management is crucial in live trading. In case of a fatal mistake, money management can literally save your account from being wiped out. What is the right way to control your assets? How should you trade in order to minimize the possible losses? Are mini-accounts helping beginners or in fact are they actually discouraging and more risky?
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In order to survive the forex market and create profits, let's consider the following:
1. Understand leverage and risk levels
Although some professional traders might suggest that risking no more than 10% is about right, I personally wouldn't suggest going anywhere higher than 2% of your trading account balance on each trade. Why keep such a low profile? Risking only 2% of your funds gives you an ability to endure the market volatility. In case the trade goes the wrong way, you will be able to get out of the trade yourself and try again instead of getting a margin call when your funds hit zero. Losing is part of the game. There are good days and bad days. Be prepared that you won't be winning profits every single day. Your goal is to protect your money and make your winnings larger than losses within an extensive period of time. If you can do so, you can call yourself a professional forex trader.
2. Write down your gains and losses
Keep a journal of your gains and losses. You can type it in excel document or write down by hand, whatever works better for you. It is important to analyze the results. In case you are losing more than winning, it is time to rethink your trading strategy.
3. Practice with demo account
Some traders say that demo accounts are a waste of time because you are not really trading the real money so you are not exposed to fear, greed and other emotional obstacles that need to be locked away. I personally think that it is necessary to practice with demo account and go over your strategy before jumping into the deep water of real money forex trading. Today almost all forex brokers offer free demo accounts with all the features of the live trading account. Even if you don't experience the emotional traumas only possible with live trading, practice has never been useless.
4. Have sufficient capital to trade
The worst thing you can do to yourself is attempt to trade without enough money in your account. A trader with limited capital is not only a stressed out trader, but also a trader that will hit a margin call and be taken out of trades so frequently that he or she won't be able to understand trading at all. So what about mini-accounts with low minimum deposit requirements? One of the reasons why forex is so attractive to beginners is the small accounts. However, these small accounts are exactly the types of the accounts that get wiped out almost instantly, leaving the beginner with the sense of low self esteem and probably a complete disappointment.
5. Find your comfort zone
Before entering a trade, decide how much money are you ready to lose and whether it affects your daily life in any way. Never trade an amount you cannot afford to lose. Forex is not the Wheel of Fortune. You are not going to become a millionaire by magically entering a trade, guessing the direction and hoping for the best.
6. Take part of your profits out
Once you start making profits, you don't need to risk all your money. Don't put all your eggs in one basket. If you are doing great and increase the position size, the amount of loss increases as well. Meaning that, at some point you might be risking a trip to Hawaii, a house or even a retirement at the age of 30. Don't put so much pressure on yourself because that can only lead to wrong decisions based on emotions. The best way to deal with this kind of situation is to take some of that profit out on a weekly, monthly or at least a yearly basis. The trick is to do it systematically, instead of creating a pile of enormous amount of money in one trading account.
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