How to become a successful trader? Learn to utilize your money effectively with maximum profits and minimum risks. Does that sound too vague to you? In such a case, below, we will mention and describe 6 main principles, which you must follow, if you want to both preserve your capital and increase it.
First, we would like to highlight that money management in terms of trading is a complex notion, which consists of multiple aspects: from performing scrupulous market and news analysis to selecting an optimal time for a trade and controlling related risks. The priority is to keep an optimal balance between potential profits and risks associated with an exact decision.
Many beginners get confused by this task and do not know how to approach it. However, for your convenience, we will present 6 easy-to-understand basic rules on Forex money management:
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- Limit your risks to 2% of your overall capital. That is a universal principle for all traders and for any market conditions. Beginners are often tempted to make bigger stakes as they want to get high profits right away. Naturally, that usually results in unbearable losses, which put an end to their trading career. So, stay patient and wise and keep to small sums.
- Do not increase the risks regardless of your results or market conditions (especially if you are still a newbie). Obviously, when you start winning one deal after another, it may seem to you that increasing sums is a great idea as it will allow you to get maximum advantage from such a fortunate period. But you must not get tempted as there is a significant risk that such a decision will end in huge losses.
- Choose deals with a risk to reward ratio of 1 to 3. That means that, if you win, you will get three dollars for every dollar, which you will put at risk.
- Risk only those sums, which you can safely afford to lose. Otherwise, you may get too nervous and emotional, which will prevent you from making sound decisions and increase the possibility of a loss.
- Master stop-loss and take-profit orders. The first of these instruments allows setting a maximum limit of potential losses, and the second one ― fixing profits when they reach the maximum.
- Watch currency correlations. When opening several trades, analyze how currencies involved relate to each other, for example, they can move in the same direction or vice versa. So, do not open deals that cancel each other. Also, if you want to trade a commodity currency (like the national currency of Nigeria, which depends on the current value of crude oil), check the movements of the price of the corresponding commodity (good).
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Thus, if you are interested in minimizing trading risks, losses, and associated stress and maximizing potential profits, we insist that you should scrutinize and adopt the principles described above.