Money management remains to be one of the most important aspects of foreign exchange trading. It is often overlooked because of the other things that enable a trader to be successful, such as the trading strategies. Perhaps the reason behind it is that the rest contribute to the actual making of money and growing your success, as opposed to money management, which only deals with how well you put your money to use when trading.
However, this should not be the case because every experienced trader will tell you that money management should hands down be at the top of a good traders check list. This is because, money management could be the only forex trading practice that seeks out to actually protect you from losing all your money, and if we are going to be honest, no one ventures into any investment, much less forex trading, to lose money.
Money management practices versus trading strategies
In any trading battle between money management and trading strategies, the strategies win. The logic most people use is that the strategies is where the real money is, and mastering them will get you to start making money in no time. However, without any sort of money management plan whatsoever, you can just as easily lose all your money and end up being worse off than when you got into the forex trading business. You can find good guidelines on money management at sec.rakuten.com.au
It goes without saying that every trading strategy needs a money management plan, because even the best strategies go through losses. The forex trading market is very unpredictable, and while a strategy can be perfect, the market conditions may tend to be quite unforgiving. Bad cycles happen to everyone, and this is how everyone gets to make money, one loss in one place could mean a win in yet another place.
Keeping trading emotions at bay
As forex traders are human beings, they go through emotions and can sometimes fail to push them aside when trading. This is a huge mistake and can end up messing a trader’s money making potential big time. For instance, some traders will fail to see the need to quickly get themselves out of a trade that is losing, because they have hopes that it will start making profit again. The possibility that a losing trade will pick up again are too slim to justify a trader not leaving it.
This is one of the reasons why money management is so important. It can help traders avoid such kinds of situations because they have to follow a preset plan that guides them on how to trade from start to finish. Wherever money is involved, it is so easy for a person to be overcome with greed, as well as fear. You would have want to make as much money as you possibly can, but you also do not want to lose any of the amount that you had or have earned. These are however negative impacts of trading which can easily be put at bay by the basics of a money management plan.
Going about risk per trade
Having a safe trading risk is important if you want to stay active in the market. This is because, the percentage of your account that is put under risk per trade, is going to eventually affect the size of position that you will be able to take. Sadly, not many people actually protect themselves using a safe risk per trade percentage, until it is too late. There could be nothing worse than wishing you could have easily done something that would have prevented you from losing money.
There are basic principles to having the right risk per trade. For one, a trader should never try to risk on a single trade, any more than 2% of his trading account. Furthermore, he should never try to risk on all trades combined, any more than 5% of his trading account. If anything, a new trader should have a much lower risk per trade because his chances of messing up are relatively higher.