Components of money management in forex trading

Investors who have incorporated a money management system into their forex trading plan know how to control the money they are risking in every forex transaction. When they get an entry signal from their trading system, they already know how much money they can invest. They usually invest as a percentage of their equity and that percentage is always fixed. By risking a fixed percentage of the investor’s equity, the forex trader gradually increases his wealth while making profits at the same time. On the contrary, his wealth gradually decreases as he loses.

The trader’s profile is a component of a money management system. Common trader profiles are day traders, swing traders and position traders. A day trader is someone who sells everything at the end of the day. He/she also trades in high volume. The overall goal of a day trader is to make a quick turnover. The swing trader, on the other hand, works with a longer time frame. The position can be held for a few hours or even days. Timing is of the essence for the swing trader. The position trader requires the longest time frame. He/she can hold his/her position even for years. He/she examines interest rates, government decisions and economic models before making trading decisions. The trader’s profile can determine what type of management system he/she has.

Lot or trade size also determines how a trader can manage their money. It is primarily determined by the amount of money one deposits into their trading account. It is highly recommended that the trading capital is worth at least 3 campaigns of 10 trades each.

Leverage is also part of money management. Although the trader/broker sets the maximum leverage that the trader can use, the investor usually determines his/her leverage per transaction with account size and trade size as factors that help determine leverage.

The total equity in play, which is a percentage of the account used for margin at any given time, is determined by the number of concurrent open trades, the trade and the trader’s leverage. For new traders, the recommended number of open trades is two, with no more than half of the total equity in play.

The use of stop loss is also a component and must be consistent with the money management strategy. The percentage of money the investor is willing to risk is an important factor in determining the stop loss. Once the percentage is settled, the trader must ensure that he does not exceed that percentage on any forex transaction.

Managing transactions while the position is active is also important to managing his/her money. The stop loss can be adjusted if the investor profits from the open trade, but he needs to make sure not to risk too much. Proper money management involves the discipline of learning how to quit.

Forex trading can be very profitable, but also very risky. Any wrong decision can result in losing your investment, which is why the investor must take care of proper money management to protect his wealth.