The Novice Forex Trader Needs To Manage His Money Carefully

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Before you begin to trade on the foreign currency market it is vital that you take the time to study the currency markets and that you start your Forex trading with a very clear philosophy and a defined strategy. Then, once you start trading it is equally important that you manage the funds available for trading with great care.

As well as knowing which currencies you should trade and being able to recognize entry and exit signals for trading, the successful Forex trader has to be able to manage his resources and to incorporate sound money management into his trading plan.

There are a number of different strategies that can be applied to money management, but the majority of them will require you to keep a track of your core equity. Your core equity is the sum that you start trading with less the money that you have in any open positions. So, if you start trading with $15,000 and have $1,500 in open positions then your core equity is $13,500.

As a general rule, when you first start out you should try to limit your risk to no more than 1% to 3% of every. Thus if you are trading a standard Forex lot of $100,000 you should keep your risk to $1,000 to $3,000 and, for safety, should probably start at just $1,000. You can achieve this by placing a stop loss order 100 pips (where 1 pip = $10) above or below the position at you enter a trade.

Naturally over time your core equity will rise or fall and you can then adjust the dollar amount of your risk. Taking our example above, with an opening balance of $15,000 and one open position, your core equity is $13,500. If you then add a second position, your core equity will drop to $12,000 and you should limit your risk accordingly.

On the same basis, as your core equity increasesrises, you can also raise your level of risk. Consquently, if trading is going well and you make a profit of $5,000 your core equity will rise to $20,000 and you could raise your risk to $2,000 per transaction. As an alternative, you could also decide to risk more of any profit made than you would be prepared to put at risk from your original opening capital. You could, as an example, risk up to 5% of any realized profits ($5,000 on a standard $100,000 lot) to give yourself a better profit potential.

The secret to profiting from Forex trading relies on a number of factors and one very important part of your trading strategy lies in your ability to control and manage the money that you have available for trading.

About the Author:
Learn Forex trading online and discover the benefits of Forex mini trading at LearningForexTradingOnline.com



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