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Money Management – An important aspect of Forex trading

There are millions of people out there making their fortunes in the forex markets. You could also be one of them. To do that you have to first ensure that you are indeed dealing with a respectable company engaged in forex trading. The avalanche of interest in forex markets has meant that not all of these companies are genuine. This is where you got to be careful. Forex trading at its best should be conducted through a reputed broker. Once you have a reputed broker in place, the next important thing is to have a good money management policy in place as well.

There are several principles in forex trading that have to be understood well. One of that is money management. The point is, whether you do forex trading or trade the stock markets money management is a vital aspect that you should be proficient with. If you do not give importance to money management, you could well end up loosing money in forex trading.
There is an old saying “Don’t put all your eggs in one basket”. This is very true in the context of forex trading too. In fact any prudent financial investment whether it is forex or stocks follows this cardinal principle. For example if you invest all your money in a particular forex trade it is a sure recipe for disaster. Always remember that money management in the context of forex trading simply means, never risk more than 5% of your capital on any one particular forex trade. This is the crux of the philosophy behind money management.

Exactly how does this strategy help?

The key point is if you invest less than 5% of your capital on any particular trade, you are less likely to get emotionally attached to that particular trade. So if you are not emotionally attached to a particular trade, you are not likely to get annoyed if the market trades badly for you. If you have a money management policy in place, you will not have the urge to get even with the market by investing more and more into a trade that might ultimately turn out to be a loosing proposition. The urge to get even with the market by investing more thinking that if you don’t do so, you might indeed end up on the loosing block is indeed a very dangerous tendency. All forex traders would have experienced this urge. Only the successful would have had the gumption to control this urge. The point is, if you keep to the golden rule of investing 5% or less per trade you automatically cut out the urge to invest more and more of your capital into a trade, in the mistaken notion that if you don’t do so, you might end up loosing money. That simply isn’t true. Stick to the 5% rule and you can avoid the possibility of investing haphazardly.

It is simply impossible that all successful forex traders would have made only good trades. That’s highly unlikely. If all forex traders were perfect traders then there would not have been a forex marketplace at all. You will win some trades and loose some. But the point is you must learn from your loosing trades and refrain from making the same mistakes again.

A wise forex trader would limit his risks to the barest minimum. This can only be done by having a money management plan, or else how would you know when and how to limit your risks? If you look at the trading history of a trader who consistently looses money you will notice the absence of a money management plan.
When you trade, you are always likely to come across a sudden urge driven by the thrill of opportunity of making huge money. Sometimes it could be that the direction of particular trade was going the way you expected it to be, or sometimes it could be that you were loosing a trade and you want to continue investing thinking that it might turnaround any moment. Imagine a scenario that in both cases your judgment turned out to be false. In other words the continuation of the trend you expected did not happen nor did the trend reversal happen in the other case. What this means is that, you would have lost a lot of money. But supposing you had followed the golden rule of not investing more than 5% of capital no matter what the urge was, you would then have saved your money. That is the importance of money management. Never allow overconfidence get the better of you. Follow the rules of the game or else your forex experience would be short lived.

Create your own money management plan

Finally create your own money management plan. How do you do that? You know your goals and objectives in forex trading. You also know the kind of money you would use to fund your trading account. Now do the calculations and figure out how much you could really risk per trade. Of course you would have to follow the golden rule of not investing more than 5% per trade or even less to be more comfortable. Write the figures down and keep it in front of you every time you trade. Those are the limits you have set yourself. Keep it in front of you every time you trade. Reminding yourself of your own limits in trading is a wise way to help prevent you from overtrading.

Money management is a skill you have to develop over a period of time. It is a skill that will help you keep grounded and help eliminate temptation and overconfidence. Never have the false notion that you would win your trades all the time. No you can’t always win in forex trading. But having a money management policy will limit your losses so that you live to see another day in forex trading which could well turn out to be successful. If there is one thing that money management plan can help you, it is to help prolong your forex trading activity. If that happens you could be on the road to profits.

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