once you have established a trading philosophy and decided upon a trading strategy, it is vital for foreign currency traders to manage their trading funds and this article gives a brief insight into exactly what is meant by this.
Before you start trading on the foreign currency market it is crucial that you take the time to learn the ins and outs of markets and that you begin your Forex trading with a clear philosophy and a definite strategy. Then, once you begin trading it is equally vital that you manage the funds available for trading with the greatest of 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 money management into his trading plan.
There are many different strategies that can be applied when it comes to money management, but most of them will be based upon keeping a track of what is known as your core equity. Your core equity is the sum that you begin trading with less the money that you have in any open positions. So, if you begin trading with $15,000 and have $1,500 in open positions then your core equity is $13,500.
Generally speaking, when starting out you should try to limit your risk to 1% to 3% of each trade. This means that 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 (1 pip = $10) above or below the position at you enter a trade.
Of course over time your core equity will rise or fall and you can then adjust the dollar amount of your risk. Looking at our example above, with an opening balance of $15,000 and one position open, 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.
Using the same principal, as your core equity increasesrises, you can also raise your level of risk. Consquently, if trading is going in your favor and you have made a profit of $5,000 your core equity is now $20,000 and you could raise your risk to $2,000 for each transaction. Alternatively, you might also decide to risk more of any profit made than you would be prepared to put at risk from your original starting capital. You might, as an example, decide to risk up to 5% of any realized profits ($5,000 on a $100,000 lot) to give yourself a greater profit potential.
The secret to profiting from foreign currency trading relies on a number of different factors and one extremely important element of your trading strategy lies in your ability to manage and control the money that you have available for trading.
