FOREX Money Management Tips

Money management is by far the most important skill to master if you want to become successful at trading FOREX.

FOREX Money management is simply a system you incorporate that will effectively preserve capital while you increase your profits.

In other words a good system will help keep you from loosing all of your money and help you make money.

The goal at Trading Currency Online is to introduce the newbie FOREX trader to the concepts and mechanics of trading currency and not to be an all inclusive source of information.

For our money management section we have decided to offer what we feel are the most fundamental tips on the issue of money management.

When you decide to open a brokerage account and actually start trading FOREX with real money, in essence you will be gambling.

You will be wagering that the price of one currency in relation to that of another is going to rise or fall. It is really that simple.

What differentiates FOREX wagering with that of say going to Las Vegas and pulling the slot machine arm all night long is that with FOREX you can educate yourself on how the market operates and develop a trading plan based on that knowledge that will allow you to make an EDUCATED BET.

With knowledge of how the market works and a trading plan that incorporates a solid money management system, you tilt the odds in favor of your success in FOREX.

Money management is important because even if you have a winning trading system and poor money management skills you will eventually loose your account whereas you could loose more trades than you win but with strong money management skill you could continually add to your trading account.

Here is a list of items that you might consider incorporating into your money management program.

FOREX Money Management Tips

Undercapitalization -- Most businesses fail because they are undercapitalized. Do not expect to make FOREX millions trading on $500 account.

Never trade funds you cannot afford to loose – In the beginning while you are learning to trade, trade with “play money.” Most every FOREX broker will allow you to trade a fictitious account while you develop the necessary skills and confidence to start trading with real funds. After you have a track record of successful trades, only then should you fund your account with real money and only money you can afford to loose. You should never borrow funds or mix funds from your retirement or other investment accounts. Remember that while trading FOREX can be lucrative, you are gambling with your funds.

Have a plan – Determine what you want from FOREX and develop a plan to get you there.

Never risk more than 5% of your total capital on a trade – This number can vary depending on the size of your trading account.

Never ever trade without a stop loss order in place – When you enter a trade you can never know for sure how much if any profit you will make but you can determine before hand how much of a loss you are willing to take by using a stop loss order. You determine placement of your stop loss by how much risk you are willing to take on the trade. If the particular trade entails too much risk, pass on it.

Determine your risk-reward ratio – Why would you risk $1000 to make $500? In the case of this trade the risk-reward ratio is backwards at 2:1. Ideally you should never enter a trade that offers less than a 1:2 risk-reward and many FOREX mentors advise staying out of the market until a 1:4 trade comes along.

Lock in profits – Once you are in the money, adjust your stop loss to lock in profits.

Let profits run and cut your losses short– If a trade moves against you deal with it and get out keeping your losses small. Don’t make the mistake of “waiting for the market to turn back around.” On the other hand don’t be too greedy and close your position as soon as you are in profit. Often traders close their position too early only to discover they could have profited much more if the would have let their profits run.

The trend is your friend until it ends– Unless you have very good reason always trade in the direction of the trend.