Forex trading is one of the most lucrative and appealing practices for any aspiring investor, thanks in part to its highly leveraged nature and the liquidity of major international currencies.
However, the fact remains that around 70% of forex traders lose money in the marketplace, which also underlines the volatile nature of the sector and the challenges facing traders on a daily basis.
If you’re to optimise returns, it’s crucial that you’re able to successfully manage your capital as a forex trader. Here are some steps to help you achieve this:
What is Money Management in Forex?
While the term ‘money management’ is well-known, this refers to a set of processes and measures that an investor will use to safeguard their capital in the world of forex trading.
Make no mistake; the underlying goal of forex money management is to preserve trading capital, with a view to minimizing losses and ensuring that failed trades (which are an inevitable part of investing in any market) aren’t too damaging.
This way, losing trades don’t become disproportionate or diminish your profits too significantly, allowing you to operate successfully overall.
In this respect, the concept of money management remains closely linked to risk management, largely because almost all of the risk portends to your capital when trading in the forex marketplace.
Of course, there are some subtle nuances in play here, as while risk management is a broader term that seeks to identify and negate a wider range of trading risks, money management is focused solely on how you use and distribute your capital over time.
How to Manage Your Money Successfully
There are many strategies and risk outlooks that you can adopt when looking to manage your money as a forex trader, but your approach should also be underpinned by a number of universal rules. These include:
1) Use a Demo Account
While understanding the theory behind forex trading is one thing, it’s quite another putting your knowledge into practice. Fortunately, you can use a trading platform’s demo account feature to hone your strategies and money management techniques, capitalising on a simulated, real-time marketplace that replicates corporeal trades and real-world price movements.
2) Only Invest What You Can Afford to Lose
This is another universal rule of forex trading and money management, as the highly leveraged nature of the market means that you can incur disproportionate gains and losses depending on the effectiveness of your trades. So, you should only ever commit capital that you can afford to lose, as this enables you to trade freely and pursue risk as and when required.
3) Use Stop Losses
From a practical perspective, it also makes sense that you should utilize the risk management measures that exist on your chosen trading platform. Take stop losses, for example, which work by automatically closing open positions once they’ve incurred a predetermined level of loss. This way, you can trade freely and set parameters based on your unique appetite for risk, as well as the amount of capital that you have to work with.