The Novice Forex Trader Needs To Manage His Money Carefully

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

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

There are many different strategies that can be applied to money management, but most of them will require you to keep 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.

In general, when you first start out you should try to limit your risk to no more than 1% to 3% of every. 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 keep yourself safe, should probably start at just $1,000. This can be achieved by putting a stop loss order 100 pips (1 pip = $10) above or below your entry position for a trade.

Naturally over time your core equity will rise or fall and you can simply adjust the dollar amount of your risk. Looking at our example above, with a starting balance of $15,000 and one open position, your core equity is $13,500. If you then add 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. So, 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 per transaction. Alternatively, you might also decide that you are going to risk more of any profit made than you would be prepared to risk from your original starting capital. You might, for example, decide to risk up to 5% of any realized profits ($5,000 on a $100,000 lot) giving yourself a better profit potential.

The secret to profiting from Forex trading relies on a number of factors and one extremely important element of your trading strategy lies in your ability to tightly control and manage the money that you have available for trading.

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