A great percentage of forex traders, both new and experienced still lose their trading accounts within the first month they open them. Even with a profitable trading system, an account is doomed to fail if a forex trader does not apply the right money management strategies. The proper money management strategies ensure that the traders have a way of protecting their balances when they are in profit and protect their accounts from depletion when the trades work against them.
Do you have a reasonable risk-return expectation?
One common misconception that new traders have is that depositing a lot of capital will automatically translate into being able to wait out the losing trades longer and gain more profits in future. In turn, some traders keep on depositing extra money when their account seems headed towards a margin call. Unfortunately, that school of thought deceives many traders who end up losing much more than they would have if they had opted out of some losing trades at the right time.
Having a proper risk-return target before entering a position will protect them from that pitfall
A proper risk-return ratio like 1:2 prevents you from trying too hard to turn $1000 into $50,000 with just a few trades. When people are too aggressive, they end up taking up risky trades just because they want to meet unrealistic targets. Often, the risky trades involve over-committing on margins. When traders commit too much margin into a single trade, a small swing against their expectations will get their accounts quickly headed to the red. Looking at the same conversely, when too little margin is committed, the traders are probably under-utilizing their capital.
Consider the percentage capital strategy
The percentage capital strategy helps traders simplify their risk down to every single trade. The strategy suggests that the risk per trade is best kept between 2 to 4 percent of the capital. The percentage may seem small and negligible at first but it is ideal for longer term trading. Banks and hedge funds apply this level of risk to gain steady profits while still sheltering themselves from financial catastrophe. The cautious traders are advised to keep the risk at about 2% per trade while the very aggressive traders are encouraged to keep their risk below 4%. The levels provide an optimum growth that is enough to sustain a forex trading career.
Re-invest some profits regularly
Regularly evaluating the baseline of your account and choosing to reinvest or cash out a reasonable time is highly recommended. Re-invest part of the profits made so that the capital can keep on compounding itself thereby giving you more chances to grow your returns with time. Updating the position sizes as time goes by is the straight-forward way to go about it. Regular evaluation gives you a chance to also take out some rewards and enjoy your investments. Forex trading is worthwhile if you are able to harvest some of your returns and direct your hard-earned money to your personal projects.
Preserve your chips
A great trader learns to take the losses cheerfully and learn from them. Trade journals let you revisit the extremely good or bad positions and let you identify common mistakes that can be avoided. Trailing stops are a convenient way to properly manage your open positions if you still struggle with exiting too early or having your stops taken because you waited too long to exit. Adopt these money management tips to improve your forex trading routine.