What is Money Management in Forex Trading?

Forex Trading can be so profitable and at the same time “not profitable”, to trade in the Forex markets is to speculate on uncertainty in the prices of global currencies and other financial securities and since no man is gifted with the ability to see the future; no one can be 100% certain about what might happen next in the forex market.

When people come into forex trading, they usually come with this mind set of making millions of naira, retiring young and live a carefree life for the rest of their lives. In forex, this fantasy is further reinforced and told to newbies (those new to forex trading) by the folklore of the forex marketers and forex educators.

Most of them usually use people like George Soros and Warrant Buffet as example of people who make it big by trading in the forex market, no doubt George Soros who is widely known because of now he “broke the Bank of England” by shorting the pound and walked away with a cool $1-billion profit in a single day.

He did that because he was very certain about his bet on the British Pound and the writing were on the wall due to the failing economy of the United Kingdom as at then.

ALSO READ: 5 Common Mistakes Nigerians Make When Trading Forex

To experience traders, when we talk about forex trading they see it as a business that because there are a large percentage of Forex traders who will grumble, just like any business man out there, but why the grumble? That is because they (forex traders) have failed not just failing to keep their account afloat but failing to utilize the concept of money management firmly in their grasp.

In this article we will explain the term Money Management and now it can make you a better and profitable trader as well as reduce your losses and exposure to the financial market.

As I have easier said, a large percentage of Forex traders fail because they don’t understand the concept of money management, so what is this money management all about.

What is Money Management?

Money management is a simple concept that denote or explain how traders should be able to manage their trading capital even when they make a loss while trading.

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Money management tries to balance two things, which are “restricting worst-case scenario losses to an acceptable level whilst maximising potential profits”, let me explain, money management reduces risking so much of your trading capital so that you don’t lose everything and money management makes trading so conservatively that most of your money is still in your trading account when you win or make profit.

Ways on How to Implement Money Management in Your Day To Day Trading.

One of the ways to implement money management is to have a good and adequate money management strategy. Having a proper money management strategy will allow you to keep trading through the bad times that will inevitably occur in forex.

There are so many books, video and articles written on the subject, often involving complicated mathematical analyses and thesis. However, the good news is that the best money management strategies can be simple, a good money management strategy will answer the following questions; when to enter into a trade, when to exit a trade, which currency pair to trade and possible ways on how to manage your money.

The second way to implement money management in your trading is to always use stop loss. Stop loss can be used and is the best possible way of allowing your profits to accumulate when you have a winning position and quickly shut down a trade going against your desired direction.

The third way is by using currency correlation, usually currency pairs tend to move in correlation with one another more than other financial asset types such as stocks, bonds, treasury bills. You need to understand how “intermarket correlation” works between currency pairs to effectively use this to trade and implement it while trading.

VISIT: How Money Is Made Trading the Forex Market

That is, currency pairs are either strongly correlated either positively or negatively. Positively correlated means that there might be two currency that moves in the same direction or negatively means correlated  which means they move in the opposite direction.

If you trade the major currency pairs such as EURUSD, USDJPY, GBPUSD etc, all of your positions are likely to be correlated with one another, as most significant pairs are connected to USD.

Remember. You can make trading decision and fix your money management strategy on currency correlation. If you allow high exposure on correlated pairs, your account balance will be heavily affected by the movements of just one or two of them.

The next way is by using compound interest which is the exponential growth of a sum of money by continuously reinvesting all profits without any withdrawals, so although the profit percentage remains the same, the original amount of money might grow at a rapid rate.

With the power of compounding, in the long run, you will be able to grow your account by a considerable amount! This could be a good money management plan for you!

However, beware of the human emotions such as greed and impatience, you will suffer more from emotions as you realise your trading capital is increasing. If you notice that this is happening it means it is time for you to step back into reality.

Professional traders uses this method, by applying these advices, and trade using money management, you should be able to make consistent profits if you adhere to this.

Don’t forget that the Forex Holy Grail lies hidden inside you. Hone your money management skills.

In conclusion,

A good way for forex traders to minimize their loss and increase their profit and to effectively manage their trading capital is to remember that they are not in a casino or doing some sort of sport betting.

Unlike in gambling, where losers need to place higher bets to increase their profits, Forex go in the opposite direction. Some traders never bet more than 1% of their equity (trading capital).

The fact is that trading is not about what you want to make as profits, because profits will always take care of themselves. It’s about what you don’t want to lose that matters.

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