It is undeniable that currency trading or commonly known as Forex trading is becoming popular among investors. However, more and more traders find out early on their trading careers that it is difficult to become a successful trader. One huge factor that hinders traders to profit in the Forex market is their improper money management tactics.
Trading Forex is a business of making money so for a trader to make more cash, he needs to learn how to manage it effectively. A lot of traders get too excited to start trading right away without thinking much of their account size. This can now be considered as gambling instead of trading.
Even with an effective trading strategy in place, a trader will keep on losing money once a gambler’s mindset develops in his head. Good money management skills are essential in order to cope with this very serious problem.
Money management strategy is important to control exposure to risk. Every trader is advised never to risk more than 2% of their account on any singular currency pair. Two percent capital at risk is a recommended industry standard for maximum risk in a trade. But that number is based on your win to loss ratio with your risk to reward ratio.
For instance, if you risk five percent of your account that represents the dollar amount that if you lost twenty times in a row, your account would be completely depleted. So as you can see in trading, there are wins and losses it’s part of the business. It’s a business of probabilities and therefore you need to manage your risk in a way that your account would never be depleted.
Another recommended money management tip is to slowly yet steadily build your trading pot. The key is to use compounding. For instance even if you start off with a small amount of capital, you can still become extremely wealthy if you manage to grow your account by just 3% every single month.
Setting up money management rules prepares a trader every time a losing streak strikes. When that arrives, the trader will still have enough capital to trade with.