Top 10 Forex Money Management Tips | For Advanced Traders
Trading Forex successfully requires a lot of patience, a proper education, quick adaptation towards market updates, and a number of other qualities. As always, to succeed at trading you will need a complete trading plan. A complete trading plan will tell you when to enter, when to exit, which currency pair to trade, and how to manage your money. Money management is of vital importance – but it's only part of the complete picture.
The reason many traders lose money in Forex is because of their inexperience, which leads to the neglect of Forex management principles. Due to its volatility, the Forex market is inherently risky. Money management in Forex is therefore a non-negotiable success factor for both beginners and experienced traders alike.
This article will advise you on how to manage your trading capital when trading FX, as this is vital for long-term gains. What many people fail to realise is that you should not only plan on gaining profit from a single trade, or simply working on your exit and entry points - but you should also base your Forex strategy on achieving gains over a long period of time. This is where the ability to manage your finances and trade capital becomes vital.
This article will count down the list of the Top 10 best money management tips to use for beginners, as well as some additional tips for advanced Forex traders.
Just Starting Out?
If you are just starting out, you will need to educate yourself. One attitude that will help is to approach Forex trading just as you would with any career, because that is what it is. It is advisable that you develop your trading skills using a Demo trading account first. Trade this way for a period of time to understand the various trading strategies available, together with how the market works. The earlier you learn and adopt Forex money management strategies, the better.
When you feel you've learnt enough to start trading in the live markets, invest an amount that will not adversely affect your livelihood if you were to lose it all. Having other investment options on the side is also advisable. The principles of money management in Forex are quite easy to follow and have the potential to save you a lot of losses if you adhere to them properly.
Now let's take a look at the best Forex management tips for beginner traders:
The Best Forex Money Management Tips
1. Quantify Your Risk Capital
Calculate the risk involved in the trading process. If the chances of profit are lower in comparison to the profit to gain, stop trading. You may want to use a trading calculator to measure the risks more effectively. Many of the important aspects of money management proceed from this key value.
For example, the size of your overall risk capital will be a factor determining the upper limit of your position size. You might consider it prudent to risk no more than 2% of your overall risk capital in any one particular trade. Additionally, you can always implement risk management into your strategy, to make sure you are managing the risks effectively.
2. Avoid Trading Too Aggressively
Trading too aggressively is perhaps the biggest mistake new traders make. If a small sequence of losses would be enough to eradicate most of your risk capital, it suggests that each trade has too much risk. A good way to aim for the correct level of risk is to adjust your position size to reflect the volatility of the pair you are trading. But remember that a more volatile currency demands a smaller position compared to a less volatile pair.
3. Be Realistic
One of the reasons that new traders are overly aggressive is because their expectations are not realistic. They may think that aggressive trading will help them make a return on their investment more quickly. However, the best traders make steady returns. Setting realistic goals and maintaining a conservative approach is the right way to start trading.
4. Admit When You Are Wrong
The golden rule of trading is to run your profits and cut your losses. It's essential to exit quickly when there's clear evidence that you have made a bad trade. It's a natural human tendency to try and turn a bad situation into a good situation, but it's a mistake in FX trading.
Here's why – you cannot control the market.
5. Prepare for the Worst (Past Performance is Not Indicative of Future Results)
We cannot know the future of a market, but we have plenty of evidence from the past. What has happened before may not be repeated, but it does show what is possible. Therefore, it's important to look at the history of the currency pair you are trading. Think about what action you would need to take to protect yourself if a bad scenario were to happen again.
Do not underestimate the chances of price shocks occurring – you should have a plan for such a scenario. You don't have to delve far into the past to find examples of price shocks. For instance, in January 2015 the Swiss Franc surged roughly 30% against the Euro in a matter of minutes.
6. Envisage Exit Points Before Entering a Position
Think about what levels you are aiming for on the upside, and what level of loss is sensible to withstand on the downside. Doing so will help you to maintain your discipline in the heat of the trade. It will also encourage you to think in terms of risk versus reward.
7. Use Stop-losses
Using stop-losses for every trade position you initiate is a good money management tip. Stop-loss orders shield your investment from unexpected shifts in the market. Since there is always the possibility of a loss, set your stop-loss order not to exceed more than 2% of your trading balance for any given trade. Let's say you have a trading balance of $20,000. Your stop-loss should be about 40 pips for a trade, so that if the trade goes against you, all you lose at your stop-loss will be $80.
There are different types of stops in Forex. How you place your stop-loss will depend on your personality and experience. Common types of stops include:
- Equity stop
- Volatility stop
- Chart stop (technical analysis)
- Margin stop
A good money management strategy in Forex is based on survival. Always remember that survival is the highest priority - and that profit comes later. One of the important Forex money management techniques involves preventing high losses. This can be achieved by using the stop-loss process in the best and most efficient way. Always try to accumulate your profit. If you find you are are always losing with a stop-loss, analyse your stops and see how many of them were actually useful.
It might simply be time to adjust your levels to get better trading results. Stop-losses help traders to cut losses, and are especially useful when you are not able to monitor the market. At the very least, you should use a mental stop if you don't want to use an actual order in the market. Price alerts are also useful. You can also set up SMS or email alerts with the MetaTrader 4 Supreme Edition plugin.
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8. Don't Trade on Tilt
At some point, you may suffer a bad loss or a burn through a substantial portion of your risk capital. There is a temptation after a big loss to try and get your investment back with the next trade. But here's a problem. Increasing your risk when your risk capital has been stressed, is the worst time to do it. Instead, consider reducing your trading size in a losing streak, or taking a break until you can identify a high-probability trade. Always stay on an even keel, both emotionally and in terms of your position sizes.
9. Respect and Understand Leverage
Leverage offers the opportunity to magnify profits made from the risk capital you have available, but it also increases the potential for risk. It's a useful tool, but it is very important to understand the size of your overall exposure. Your broker may give you some leverage on your account to enable you to trade for bigger profits. However, you need to be careful when using this facility. For example: a leverage of 1:200 on a $400 account means that you can place a trade for up $80,000. On the other hand, applying leverage of 1:500 means that you can trade up to $200,000.
Your level of exposure to risk is therefore higher with a higher leverage. If you are a beginner, avoid high leverage. Consider only using leverage when you have a clear understanding of the potential losses. Therefore, you will not suffer major losses to your portfolio - and you can avoid being on the wrong side of the market. Leverage is one of the advantages of the Forex market. It can help you to achieve more, but it can also work against you. Caution is recommended.
Admiral markets offers different leverages according to trader status. Traders come under two categories: retail traders and professional traders. Admiral Markets offers leverage of 1:30 for retail traders, and leverage of 1:500 for professional traders.There are benefits and trade offs to both, and you can find out what is available to you with our retail and professional terms.
10. Think Long-Term
It stands to reason that the success or failure of a trading system will be determined by its performance in the long term. So be wary of apportioning too much importance to the success or failure of your current trade. Do not bend or ignore the rules of your system to make your current trade work.
Advanced Money Management Forex Tips
One of the most common problems amongst Forex traders is money management. It is most problematic with new traders, but it is also a problem for advanced Forex traders. With this in mind, let's look at some more advanced tips. Always remember that successful traders use these Forex money management approaches to become more successful in their field of trading. It requires some discipline in the trading process - and following specific rules.
Once you have mastered the basic tips, you should begin to implement them into your money management strategy.
Have a Forex Trading Plan
Have a Forex trading plan and stick to it in all situations. Your plan will include your money management strategies. A trading plan will help you to keep your emotions in check and will also prevent you from over trading. With a plan, your entry and exit strategies are clearly defined - and you know when to take your gains or cut your losses without becoming fearful or greedy. This brings discipline into your trading, which is essential for successful Forex capital management.
This is not directly related with money management. In fact, it has more to do with developing a disciplined approach towards trading.
Covering Lost Capital
During Forex trading money management, remember that the process of covering lost capital is difficult. For example, you lose $1,000 by investing $5,000. The percentage loss is 20%. So to cover that loss, you need to get a profit of 25% with the same amount. You also need to pay an attention to the spreads and commissions offered, as this is a potential expense for you. Make sure you can cover all expenses and any costs incurred to you, so that they won't have too much of a negative impact on your life.
In addition to what was discussed earlier concerning stop losses, using the concept of protective stops in Forex money management strategy is also a good way to improve money management. Protective stops are stop-losses that result in profit. In other words, once you have opened a position and have a floating profit of $500 USD, set a stop-loss that would result in a floating profit above $100 USD (depending on the chart, of course). This way, even if the price changes drastically and you hit your stop-loss level, you will still achieve some profit.
Take Less Stress
Don't become stressed in the trading process. The best Forex trading money management strategies insist on traders avoiding stress, and instead being comfortable with the amount of capital invested.
Don't Be Greedy
Avoid the feeling of greed coming into the equation. Greed can lead you to make poor trading decisions. Trading is not about opening a winning trade every minute or so, it is about opening the right trades at the right time - and closing such trades prematurely if they proved to be wrong. Always try to maintain discipline and follow these Forex money management strategies. This way, you will be in the best position to improve your trading.
Like all aspects of trading, what works best will vary according to the preference of the individual. Some traders are willing to tolerate more risk than others. But if you are a beginner trader, then no matter who you are, a robust tip is to start conservatively. We recommend practising new strategies, in a risk-free environment, with a free Demo trading account.
Trade Risk-Free With A Demo Account
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A demo account is the perfect place for a beginner trader to get comfortable with trading, or for seasoned traders to practice. Whatever the purpose may be, a demo account is a necessity for the modern trader. Open your FREE demo trading account today by clicking the banner below!
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.