When putting resources into the forex market, your prosperity is attached to your capacity to understand and properly execute the money management strategies. Talking about money management can be boring, embarrassing, or even emotionally painful for some forex traders to talk about risk and capital management because most of them know they aren’t doing it right.
It doesn’t make a difference whether you are making a lot of money or losing a lot of money if you are not doing money management the correct way. As we move forward in the article, we will be discussing five money management strategies for successful forex trading.
Consistency in Risk
After you win a few trades, you have a tendency to become over-confident. It should be stressed that there’s nothing inherently wrong with you if you do this or have done it. It’s actually human nature to become less risk averse after winning trade or multiple trades. However, it is something you’ll need to put an end to if you want to make money trading the markets.
You should know that even if you’re following your trading strategy to the extent, your winners and losers are still randomly distributed. This means, after a winning trade there is no logic-based reason to think the next trade will also be a winner. Thus, no reason to increase your risk size. But, as humans, we like to gamble, and it can be really hard to ignore the feelings of euphoria and confidence after hitting a nice winner. But you have to resist the tendency of being overconfident if you want to manage your money effectively and make a living in the market.
Professional traders do not jack up their risk exponentially after every winning trade. This is not a logical or real-world way to manage your risk. Professional traders who make their living in the markets withdraw money from their accounts each month, and most will keep their accounts funded to around the same level each month. If you’re withdrawing profits every month, then you would not keep increasing your risk amount over time.
Don’t move stop loss to breakeven.
The best thing to do regarding breakeven stop losses is that you should not move your stop loss to breakeven unless there’s a real price-action based, logical reason to do so. Moving your stop loss to the same level that you just entered it doesn’t make sense if there’s no reason to do so. Moving to breakeven arbitrarily or because you have some pre-decided or unwritten, self-proclaimed rule to do so is not an effective way to manage your trades or manage your money.
Stay Away from Greed
It’s hard to take a profit when a trade is in your favor because your natural tendency is to want to leave a trade open that’s in your favor. Whilst it is important to continue trading with potentially winning trades, you have to pick and choose when you do this; you certainly should not try to let every winning trader run.
The market recedes and flows, and the majority of the time it’s not going to make a really strong directional move without retracting a lot of it. Thus, it makes much more sense as a short-term swing trader to take a solid profit when the market is offering it to you, rather than waiting until the market retracts against your position and moves all the way back towards your entry point or beyond.
Understanding when to let the profit run
Knowing when to try and let a trade run and when to take the more certain reward is really where your discretionary price action trading skill comes into play. There’s no “concrete” rule except to say that training, screen time, and “gut” feel for reading the charts are things that you need in order to improve your skill at exiting trades. Some of the patterns that a forex trader can follow include the strong breakout patterns, some obvious signals of trend continuation and some signals in a strong trending market
These success factors and money management skills can help you in determining when to enter a trade and how to manage your money. Identification of these factors can let you determine the ways that you manage your risk and your overall capital. It can be the most boring thing when we talk about forex trading, but the importance of money management cannot be put in numbers.
It is the make and breaks factor for many forex traders. It’s time to wake up and face reality; not paying attention to risk management and capital preservation will lead you to a path of financial pain and personal stress. Managing your risk properly while trading with a simple yet effective trading strategy will help a forex trader in making profits.