Forex trading, is a global currency market and it is extremely volatile. The four major FX exchanges NY FX exchange, London FX exchange, Singapore FX exchange and Tokyo FX exchange, work in their own time zones, which vary from one another. Hence the FX market is open 24*7 for 5 days. With the markets changing rapidly and so much liquidity, FX trading is an emotional roller coaster ride for the traders. They win some and lose some, yet there comes a time when even a seasoned trader may have had enough of losses for a day. Yet hope, greed and a need to get back what was lost pushes them on and here is where trouble hits paradise. Managing money in FX trading is a must or else one stands to lose out quite a bit since FX investments are huge too.
Kishore M, Dubai based FX expert, on money management in FX says “Every trader that trades in the FX market has some sort of understanding on how would they like to invest, or till how much they can bear losses. It is only when emotions get the better of a trader that everything goes haywire”. Hence, managing money while trading in the FX market requires a trader to follow a disciplined approach.
1) If you are new to the FX market, do launch yourself into the market immediately. Prior to any kind of trading in the market, you must educate yourself about the market. Open up a practice account. Trade through this account and make your strategies, follow trends and get the feel of how volatile this market can be.
2) Start small. FX trading needs deep pockets. Over and above the money, an individual investor cannot enter the FX market, unless through a broker. Brokers will arrange for leverage when you want to start Trading. So remember, that the leverage is a money you owe. Hence start small with an investment, which will not break your financial backbone.
3) Understand that FX is a trading market and you will not always get your guesses right. You might be looking at the charts and reading trade trends. However, an event somewhere, can ripple through the FX market, plunging the prices steep or shooting the prices through the roof. If you make losses then you must be prepared to face that loss. If you make profits, don’t get carried away.
4) Use Stop Loss orders. When you enter a trade, the first precaution that you must take is to put stop loss orders. As a trader your intention is to make profits. However there is no guarantee to you not having a bad day trading. As a precaution towards ensuring that your loses are bearable, the rule is to stop loss at no more than 2% of your trading balance.
5) Understand that spreads and commissions are expenses too. Moreover, when you incur capital loses, you have to recover the same, which is extremely difficult. The point here is, investments are to be made in FX market for profits, but as they say “cut the cloth according to its length”.
6) Be warned about over doing the leverage. Leverage is a facility meant to enable you to invest more. Leverage is borrowed money from the broker, who is dealing with your FX portfolio. During your trades, the profits that you make or the losses you incur, does not negate the your broker’s commission and spread remain. With a leverage from the broker too, you give away all, that is the spread, the commission and the leverage
7) One of the most effective strategies is to know when to call it a stop. Greed and hope are vices in FX trading. Control your emotions. You might be having a ball of a day but in your greed, if you hold out a position more than needed, it will not take very long for things to sour. Stem your greed, and call it a stop when you know the time is right.
8) Following on the previous strategy, Kishore M states that calculating risks in FX trading is vital. Before trading, after watching and analyzing the charts, if you decipher that the chances of you profits are much less then you incurring losses, stop there. Do not trade for that day. Some legit Forex trading systems can provide you charts and signals that makes it easy to make decisions on your trades.
9) Select your trading hours. Since the major FX exchanges have different time zones, they usually have a some hours when they overlap. Optimize on FX trading during these hours, when the liquidity peaks and the market becomes volatile. However, here too, you have to be cautious since a volatile market is risky. The stakes are high and so are the profits as will be the losses.
10) Keep your FX rules and principles in place. FX trading is a long term investment. A trader learns something new every day. One of the key learning to money management, is to decide your exit early on, before you enter the market. Stick to your rules, because they will bail you out of the worst or will give you the break you need before you can plan on your next big move.
Money Management in FX
Open up a practice a/c
Don’t get carried away
Use Stop Loss orders.
Understand spreads and commissions
Don’t over leverage
Use Stop loss orders
Calculate your risks
Know the best trading hours
Stick to you strategy and principles
Trading in FX is fraught with risks as well as rewards. FX trading is a career for many. Learning and knowing to manage money in FX is the key to making money in this trading zone.