Financial management or forex money management is the most important pillar in forex trading.
The most important thing that must be in the minds of traders before starting trading is not how much profit will be achieved.
But the most important thing is how long traders are able to survive in the highly competitive Indonesian forex market until finally reaping profits and financial freedom (trading for a living). Examples that are often encountered in trading:
- No stop loss (limit loss)
- The stop loss is too narrow/small so it is easy to hit before the price reverses direction according to the trader’s initial estimate.
- Continue to widen the stop loss because you expect the trend to reverse as expected (trading hopping)
The real key is risk management that should be known and executed if the trader wants to be successful in the forex trading business.
Also read: 3 Forex Trading Mindsets That Influence To Be Successful Trader
Any Money Management method is basically rooted in the question of how much money you are willing to risk. ‘Risk’ here can be interpreted as the risk of loss that you want to take per trade.
First of all, determine the maximum amount of loss that you can accept. Let’s take the example of 2% risk per trade.
If there is a loss 3 times in a row, it will lose about 6%. If the 4th trade makes a profit, then the 1:3 Ratio will erase all of our losses earlier.
Roughly speaking, suppose you have US$1,000 in your trading account, with a risk of 2% per trade, meaning that each trading position must set a maximum Stop Loss equivalent to US$20 and a profit target of US$60.
Also read: Learn About How to Read Forex Chart Patterns for Beginners Traders
Forex Money Management Tips and Trick
Also read: Forex Price Movements: Pivot Points, Support and Resistance
It takes a lot of patience to be successful in the forex field, in addition to proper knowledge, being able to quickly adapt to market situations and a number of other qualities.
Likewise, to be successful in forex trading, traders need a complete and mature trading plan.
A complete plan should consist of when to enter when to exit, which currency to choose, as well as managing finances while trading.
The problem is, many traders are a little indifferent to forex financial management, even though this is very crucial in helping or not succeeding in a career in the forex field.
The reason why many traders lose money is due to a lack of knowledge so that traders are indifferent to the principles of forex money management.
The forex market has a high level of volatility, and forex money management is an aspect that supports success.
1. Calculate Capital Risk
It is better to calculate all the risks that may arise when trading. For example, the opportunity to get a profit is lower than the potential profit that can be obtained, avoid trading.
Traders can use a trading calculator to calculate exactly how much risk they might get from a single trade. Most money management departs from this, namely calculating the ratio of risk and profit.
For example, the amount of risk a trader has overall capital can determine position sizing. In general, the overall capital risk in a trading account should be no more than 2%.
For each trade, the ideal risk is no more than 1% of the trading capital. For this one, the trader must apply risk management in every planned strategy. This is necessary to ensure that traders can manage risk management properly.
Also read: What is Forex Trendline Analysis
2. Avoid Aggressive Trading
Especially novice traders, maybe this is one of the big mistakes that are often made, namely trading too aggressively. In fact, only a small loss can shake the trading account capital, which is calculated as a whole will provide a lot of risks.
The best way to find out the right level of risk is to adjust the position sizing to the volatility of the currency being traded.
But always remember, the higher the volatility of the currency, just use a small position sizing. If the volatility is low, then the opposite applies.
3. Realistic Thinking
One thing that makes new traders often aggressive in the market is because their expectations tend to be unrealistic.
This kind of trader must be stuck with the thought that forex is easy. Through aggressive trading, traders think they can get ROI as quickly as possible.
In fact, the best traders are not calculated by how quickly profits are collected, but by how consistent the profits are. Setting more realistic goals and maintaining the trading approach used is the best way to profit from forex.
4. Admit if You’re Wrong
The golden rule in the forex business is to profit as much as possible and lose as little as possible.
If the market turns out to be not as expected, it is very important to get out as soon as possible if the strategy used does not match the situation in the market.
This condition is closely related to forex trading psychology. It is a basic human attitude to have a tendency to try to turn a losing situation into a win.
But a movie like this is a big mistake and will give you another defeat. That’s why traders can’t control the market. Simple, because of his ego!
5. Always use Stop-Loss
One important forex money management tip is to use stop-losses in various trading situations. Stop-loss orders will protect the capital placed in the market.
Since there is always a chance of losing trade, set a stop-loss with no more than 2% of the total trading account you have.
Assume in the trading account there is a capital of US$20,000, and stop-loss is placed 40 pips on each trade.
So, if the trading results do not match, the maximum loss that can be obtained is only US$80. However, where the stop-loss will be placed, completely depends on the character and experience of the trader.
There are several kinds of stop orders in forex, including margin stops, chart stops, volatility stops, and equity stops.
A good forex money management strategy is the most basic way to survive. This can be obtained through the use of several kinds of stop-loss orders.
Also read: What is Forex Trendline Analysis
6. Take a Break
At one point, the trader must have experienced a severe defeat that made the capital in the trading account almost run out.
But there is definitely a temptation after a big loss to immediately open the next trade in order to recover the previously lost capital. But this is a big problem.
This situation is the worst time to trade because it will only increase the risk of trading when the risk of the account is under pressure.
Should, consider reducing the risk if you experience a losing streak, take a break for a moment to rest and evaluate.
7. Understand Leverage
Leverage gives traders the opportunity to earn several times their profit from a small trading capital, but at the same time increases the risk opportunity.
Leverage is the most useful tool, and it is very important to understand the size of the leverage that the broker provides because of the huge risk.
The broker leverages the account to allow trading with large profits. But it’s good to be careful if you want to use this facility.
For example, the leverage is 1:200 for a US$400 account, meaning that a trader can open trading positions up to an amount of US$80,000. If the leverage is 1:500, it means that the maximum trade is up to US$200,000.
On the downside, traders will be more easily exposed to risk if they take large leverage. For beginners, it’s best to avoid this.
Consider using leverage if you really understand the risk of loss. The bottom line is that, apart from helping, leverage is sometimes detrimental.
