Money management is a strategy used by investors to have any amount of money spent yield the highest interest-yielding value. It is aimed at decreasing the amount institutions, firms, and individuals spend on non-significant items that do not add to asset basins, long term portfolios, and living standard. It makes sure that any money spent is worth it.
Money management, when used in investment management, deals with the risk the investor takes in situations where there is uncertainty. It helps answer the question of how much of the investor’s wealth must be invested so that the investor’s satisfaction is maximized. It is also behind every success in the futures and stock trading system.
The key to successful trading is money management. Having a trading plan instills discipline to stick with the plan in order to balance greed, fear, and emotions. Most investors are not hesitant to invest but they do not know what to do once they get into the Forex market. By coming up with a trading plan and following it, the investor is guided on what to do should uncertainties occur.
The concept of investors managing their wealth is also a concept of controlling risks. Investors are lured into Forex currency trading because of the leverage that it provides. Huge amount of money can be earned even though the capital invested is small. To bring everything into balance, more capital must be applied. The overall return may be reduced but it also lessens the investor’s liability for losses.
The amount to risk on a trade depends on the investor’s financial objectives, account size, risk tolerance, and how the amount fits into the trading plan. About 5% -7% on a trade is generally risked by conservative traders. This type of risk requires precise entry and exit points, or a larger amount of capital. By increasing the risk, the investor can take on wider market swings and more leverage. One must remember that if he/she has a higher risk tolerance percentage to losses, he/she must achieve a return equal that to get the losses back. A 50% risk tolerance on losses means one has to have a return of 100% to get the 50% loss back. The profit objective must be realistic if the investor wants to take on bigger risks.
The stop-loss order is also important in managing one’s money. The investor must know when to stop in trading. He/she must have a predetermined stop and must be disciplined enough to keep it. Setting arbitrary stops is generally a bad idea. Stops must be set at a stop price that fits the type of market. If the investor’s account size and risk tolerance is too small for the required risk of the market then he/she must find other markets where his/her trading plan fits.
In summary, a trading plan must be set in order for investor’s trading to be successful. The percentage that the investor must be willing to risk on a trade must fit the market and his/her trading plan. The investor’s risk tolerance and account size must fit the market where the investor is trading. Focusing on both factors brings balance to the trading plan and which somehow assures success the investor’s Forex trading.