Money management is one of the most important aspects of trading but is often either misunderstood or is largely ignored. While traders tend to spend a lot of time searching or improving their trading strategies, not much of thought is given to the money management aspect of trading.
But this is understandable as by and large there are many different principles surrounding money management which often ends up confusing the reader. Read these top 5 forex money management tips to help make it easier for you trade manage your money while trading forex. While this looks straight forward, it is a bit more complex than that. For example, if you were trading with a mini lot size of 0. If you scale down your lot size to 0.
But if you trade with 1 lot, then your stop loss has to be no more than 10 pips. This is an essential element to money management and one which combines both the money management and the trading strategy aspect.
Read more What is Leverage? It not entirely bad as widely preached, provided a trader knows how to make use of this leverage correctly.
Generally, traders who have a high equity tend to use lower leverage around 1: Leverage, when combined with the concept of margin can be very beneficial. For example, a trader could use a leverage of 1: The advantage here is that by increasing the leverage, there is a wider scope for the margin and thus any adverse price moves will not result in a margin call.
However, on the flip side, using high leverage can result in greater losses, and one which was experienced earlier in when the Swiss National Bank dropped the EURCHF peg which left traders who were over leveraged taking on more losses than their equity balance. For example, trading on exotic currencies where the spreads are usually around 50 pips or more can be disastrous to your trades. You would have to end up compromising on either your money management or accept a less than 1: By sticking to the most liquid currency pairs or instruments such as the majors, the low spreads can help traders to better manage a trade.
In other words, aiming for a pip profit with a 50 pip spread is more risky than aiming for pip profit with a 1 or even 5 pip spread. One of the biggest reasons why traders often end up ignoring their trading rules is due to emotions which tend to grow stronger and risk your equity especially after you take a trading loss.
True, while there are traders who do achieve such goals, it could be that they are more experienced and are trading with a higher equity. Greed is often a strong emotion that needs to be checked time and again and not let the emotions end up ruling your trading decisions. By having a realistic goal , be it daily, weekly or monthly, traders would be able to better equip themselves emotionally by sticking to the trading rules outlined. Improve Your Trading Skills - Don't miss our new posts!
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