Top 10 Forex Money Management Tips

Any successful trading system will, by definition, have a positive expectation. But what does this mean?
It means that in the long run, the system will make money. It does not mean you will win every time or even a lot of the time. We may take a position in the market when conditions are favourable to making a profit, but no trade is a sure thing.
Every trade comes with the risk of a loss. It is therefore inevitable that losses will occur at some point. Because it is human nature to dislike losses, many people try to ignore this harsh reality.
Here's the problem with that.
You cannot prepare for something that you ignore, so to ignore this reality is to guarantee failure. If we expect a system to make money in the long term, the aim of the game must be to keep playing.
This is where money management comes in.
Adequate money management allows you to keep trading through the bad stretches that will inevitably occur. There are many books written on the subject, involving complicated mathematical analysis.
But the good news is that money management can be simple.
As always, to succeed at trading you will need a complete trading plan. A complete trading plan will tell you when to enter, when to exit, which currency pair to trade, how to manage your money. So money management is vitally important – but it's only part of the complete picture.
Here then is a list of money management tips for Forex trading.

List of Forex money management tips

These tips appear in no particular order and are all important.
Browse the list and see how best you can implement them as part of your trading strategy.

Tip #1: quantify your risk capital

 

Many of the important aspects of money management proceed from this key value. For example, the size of your overall risk capital will be a factor determining the upper limit of your position size.
You might consider it prudent to risk no more than 2% of your overall risk capital in any one trade.

Tip #2: avoid trading too aggressively

 

Trading too aggressively is perhaps the biggest mistake new traders make. If a small sequence of losses would be enough to eradicate most of your risk capital, it suggests each trade has too much risk.
A way to aim for the correct level of risk is to adjust your position size to reflect the volatility of the pair you are trading. But remember that a more volatile currency demands a smaller position than a less volatile pair.
Autochartist is provided free to Admiral Markets clients and includes PowerStats. The PowerStats tool shows average pip movements in specific time frames, as well as other measures of expected volatility.

Tip #3: be realistic

 

One of the reasons that new traders are overly aggressive is because their expectations are not realistic. They think that aggressive trading will help them get rich quickly.
However, the best traders make steady returns. These profits can become very large over the years, through the power of compounding. But you cannot get compounded returns if you quickly blow up.
Realistic goals and a conservative approach is the right way to start trading.

Tip #4: admit when you are wrong

 

The golden rule of trading is to run your profits and cut your losses. It's essential to exit quickly when there's clear evidence that you have made a bad trade. It's a natural human tendency to try and turn a bad situation around, but it's a mistake in FX trading.
Here's why – you cannot control the market.
Recognising a losing situation and having the humility to admit you are wrong, will curtail losses before they can grow to a damaging size. It is wiser to end a loss, than to gamble with it.

Tip #5: prepare for the worst

 

We cannot know the future of a market, but we have plenty of evidence of the past. What has happened before may not be repeated, but it does show what is possible. It's, therefore, important to look at the history of the currency pair you are trading.

Try to get a feel for the magnitude of extreme price moves, so you can consider the worst case scenario for a trade. Looking into the abyss like this is not comfortable.
But it is useful.
Think about what action you would need to take to protect yourself in such a scenario. Do not underestimate the chances of price shocks occurring. To be taken out by an adverse price movement is not unlucky – it's a natural part of trading. So, you should have a plan for such a contingency.
You don't have to delve far into the past to find examples of price shocks. In January 2015, the Swiss franc surged roughly 30% against the euro in a matter of minutes.

Tip #6: envisage exit points before entering a position

 

Think about what levels you are aiming for on the upside and what loss is sensible to withstand on the downside. Doing so will help you to maintain your discipline in the heat of the trade. It will also encourage you to think in terms of risk versus reward.

Tip #7: use some form of stop

 

Stops help to cut losses and are especially useful for when you are not able to monitor the market. At the very least, you should use a mental stop if you don't want to use an actual order in the market. Price alerts are also useful.

Tip #8: don't trade on tilt

 

At some point, you may suffer a bad loss or burn through a substantial portion of your risk capital. There is a temptation after a big loss to try and win it all back with the next trade.
But here's a problem. Increasing your risk when your risk capital has been stressed, is the worst time to do it.
Instead, consider reducing your trading size in a losing streak or taking a break until you can identify a high-probability trade. Always stay on an even keel, both emotionally and in terms of your position sizes.

Tip #9: respect and understand leverage

 

One of the advantages of Forex trading is powerful leverage ratios. Leverage allows you to command an FX position that is much larger than the capital you deposit.
This offers the opportunity to magnify profits made from the risk capital you have available, but it also increases the potential for risk. In other words, it allows you to ramp up the risk to get greater profits.
This is a useful tool, but it is very important to understand the size of your overall exposure.

Tip #10: think long term

 

It stands to reason that the success or failure of a trading system, will be determined by its performance in the long term. So be wary of apportioning too much importance to the success or failure of your current trade. Do not bend or ignore the rules of your system to make your current trade work.

Money management tips for Forex trading

 

Trading is not just about a successful trading strategy. It's also about staying in the game long enough to allow the strategy to succeed. Like all aspects of trading, what works best will vary according to the preference of the individual.
Some traders are willing to tolerate more risk than others. But if you are a beginner trader, then no matter who you are, a robust tip is to start conservatively.
Why not see how our Forex money management tips can work for you, by practicing on a demo trading account?