The Novice Forex Trader Needs to Manage His Money Carefully

by : Donald Saunders

Before you start trading on the Forex it is crucial that you make time to study the currency markets and that you start your Forex trading with a clear philosophy and a defined strategy. Then, once you start trading it is equally vital that you manage the funds available for trading with great care.

As well as knowing which currencies you should trade and having the ability to recognize entry and exit signals to trading, the successful foreign currency trader must be able to manage his financial resources and to incorporate money management into any trading plan.

There are a number of different strategies which can be applied when it comes to money management, but the majority of them will require you to keep a track of your core equity. Your core equity is defined as the sum which you start trading with less the money which you have in any open positions. In other words, 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 each trade. Thus if you are trading a standard Forex lot of $100,000 you should limit your risk to $1,000 to $3,000 and, to be safe, should probably start at just $1,000. You can achieve this by placing a stop loss order 100 pips (1 pip = $10) above or below the position at you enter a trade.

Of course over time your core equity will move up or down and you can simply 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 open 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. So, if trading is going in your favor and you make a profit of $5,000 your core equity is now $20,000 and you could raise your risk to $2,000 per transaction. Alternatively, you might also decide that you are going to risk more of any profit made than you are prepared to put at risk from your original opening capital. You might, as an example, decide to 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 success in foreign currency trading relies on a number of factors and one extremely important part of your trading strategy lies in your ability to tightly manage and control the money that is available for trading.