As is true with everything else, failing to plan is equal to planning to fail. Success in forex trading requires a full-fledged plan to work on. This should tell you as to when to enter the market and when to get out. It should also point out the best currency pair to trade with and the best methods to manage your funds.
Given below are the ten best tips that would teach you how to make money in forex trading and, more importantly, how to keep the money that you have made.
Forex money management planning and how to do it
#1: Decide the amount that you want to risk
This should be done at the very beginning. The overall risk amount would decide the position size that you would be willing to trade. It is always recommended to place only 2 percent of your risk capital for any single trade.
#2: Aggressive trading should be curbed
As a newbie trader, it is not a good idea to indulge in aggressive trading. Even a small number of losing trades can wipe out most of your entire capital when you a beginner. During the starting stages, each trade is associated with an immense amount of risk. A method which you can use to get the correct level of trading is by adjusting the size of your trading position so that it reflects the volatility of the currency pair with which you are trading. However, a more volatile single currency requires that you take a smaller position than when the currency pair is less volatile. As a new trader, it is a good idea to use charting tools that will help to chart the movements of pips during specific time frames. The trader should also track other measures of volatility.
#3: It pays to be realistic about your expectations
It has been observed that the aggressiveness of the new traders is because their expectations of the trading outcomes are not realistic. They trade with a belief that being aggressive will fetch better returns thus getting a quicker return on their investment. It is interesting to see that the best and experienced traders make steady returns. Using a conservative approach and setting realistic goals always help the beginner traders better.
#4: Acknowledge your mistakes
The basic rule of successful trading is to cut the losses and run the profits. The key point that is to be noted here is to make an exit out of the market when the trader has placed a bad trade. Though it is basic human nature to try to turn around a bad situation, it is in the trader’s best interests to exit out. This is because the trader alone does not have any control over the market.
#5: Be prepared for the bad times
Though it is impossible for a trader to have control over the market, it is possible to learn from the past happenings. Though the past happenings need not repeat themselves, at least the trader can get to know as to what is possible. In this context, it is worthwhile to have knowledge of the history of the currency pair with which the trader is assuming positions in the forex market. With the currency pair at hand, the trader should have a clear-cut plan in case a bad turn takes place in the market. It is possible that bad price shocks can happen anytime and there are many pieces of evidence of this even in the recent past (January 2015) and it is best for the trader to have a keep-safe plan in such a scenario.
#6: Mark the exit points even before assuming trading positions in the market
The trader should be as clear about the losses that can he can withstand as he is about the profits that he can make even before assuming market positions. This is the first step towards developing trade discipline. This will help to limit the losses and encourage the trader to think in terms of the amount of risk against the rewards that can be earned.
#7: Use stop loss if possible
Using stop loss helps the trader to limit losses in case he/she is not able to monitor the market continuously. If possible, the trader should use at least a mental stop if he/she does not want to use an order in the market. Setting alerts for informing prices is also a good idea. The MetaTrader 4 Supreme version also allows the trader to set email or SMS alerts for prices.
#8: Do not trade soon after a big loss
It may happen that a single bad turn at the market wipes out a considerable portion of the capital of a trader. It is natural for the trader to try and make up for the losses in the subsequent trades. However, it is not a good idea to increase the risk just when the capital has been stressed. The next step, therefore, should only be to reduce the size of the trading lot. Another thing that the trader can do is to take a break up until the time he spots a profitable trade. It is good to build up steady emotions during such situations.
#9: Leverage is important
It is important for the trader to understand clearly that though large leverages can bring about exponentiated profits, it can also increase the potential for risks manifold. It is useful, but the trader has to understand leverage clearly in terms of the capital exposure that is at hand.
#10: It always pays to think long-term in forex trading
Whether or not a forex trading strategy is successful, can only be judged by its long-term performance. It is therefore not a good idea to make any judgment based on the outcomes of the present trades. The trader should not either ignore or bend the rules just because the current market trends are not conducive.
At the end of it all, each trader has to find out as to what works best for them. Even if you can tolerate more risk than others, it is a good idea for a beginner to trade conservatively in the market. It is a good idea to practice with demo accounts before entering the market.