2 What Is The Difference Between Happening-Truth And Story-Truth The Truth About Forex Money Management

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The Truth About Forex Money Management

Forex money management is often talked about but equally often ignored by a lot of traders – names like Nick Leeson and Jerome Kerviel spring to mind as traders who risked rather more money than was sensible. But what can you do to ensure that your own money management is sensible whilst still allowing you to grow your bank at a pace that is quick enough to keep you interested in trading?

Don’t risk too much per trade

Regardless of the results of your paper trading, placing real money on real trades is a completely different feeling. It’s one thing to paper trade at 2% or even more of your bank but those figures are only play money and deep down you know that’s true. If you blow up your bank on a demo Forex account, no worries, you can re-start. But if you do the same thing in real life, it’s a different story. If this is your first time trading currencies, start with a really low risk per trade – maybe as low as 1/2% of your bank – until you get into the mind set of trading cold, hard cash.

Set your stop losses sensibly

One thing you’ll soon learn when you’re using a full Forex account is that stop losses aren’t a guarantee that your trade will actually exit at that point. Sometimes the market is moving too fast and flies past your stop loss without a care for your position. This is called slippage and it happens every now and then, quite often when there is a big news item but sometimes for other inexplicable reasons. That said, you still need to set your stop loss – use a spreadsheet or calculator to decide how many pips away from your initial position, taking into account the size of the spread and the regular fluctuations in the market prices. Setting a stop loss is an art form: set your loss too tight and you run the risk of being pipped out of your trade; set it too slack and you run the risk of eating up your bank when a trade goes the opposite direction to the one you thought.

Ride your winners

Too often, traders ride their losers and cling onto trades in the hope that they will turn round. Many people also cut their winners far too quickly. It’s tempting to scalp some pips but unless scalping the market is your chosen trading style then you should resist the temptation to exit a trade too early. Sure, move your stop loss to break even when it’s safe to do that but don’t close out a whole trade too early. Most software platforms allow you to set a trailing stop loss which will help to lock in your trades whilst protecting most of your gains. Take the time to learn how to set these up in your software and watch their effect on your bank. Like most things in life, this is a skill that takes time to learn but your patience will be rewarded as your bank begins to grow.

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