One very important aspect of online Forex trading is money management. If you understand different aspects of the financial risks and the rewards of participating in currency exchange it will help you tremendously.
Money Management Tips
The advice you see can help you whether you are a first-time investor or you have been on the market for a while. If you want to increase your chance of increased positive returns please consider the following tips:
Do not “put your eggs all in one basket.” This may seem like a cliché but it illustrates how important diversification is. Instead of putting a large share of money in one investment spread it out and put some down on a variety of transactions, such as more than one currency pair.
Implement a variety of “stops.” The explanation of this is rather lengthy, in that you need to know about four different varieties of stops:
- Equity-This type of stop is one that is used most often in Forex trading. This is when you risk only a certain percentage of your trading account on a given point. Usually the percentage risked is about 2% on any transaction made. Therefore, if you have a $20,000 account you may risk about $400. (Of course, when you trade in Forex this usually is translated into “units.”)
- Chart-while you complete technical analysis you can generate thousands of possible stop combinations using stats you pull from charts. The most often used example of a chart stop is the swing high/low point.
- Volatility-Use of stops based on fluctuations of currency price seems to prove useful in many cases. This involves a variety of techniques based on a risk of about 2% of your total trading account.
- Margin-This is a stop strategy which requires online Forex trading participants to divide their capital into 10 equal parts. Usually one part of this is sent to a FX dealer, and the other remaining nine parts of the money are left in a bank account. This serves as a sort of protection and often the leverage advantage offered by brokers is about 100:1.
Monitor current market trends
This will further help you act accordingly. It will also help you make wiser trading choices.
Further explanation about stops:
It may take some time to process all the info that you are learning about stops. Remember that one main goal is to minimize risk and maximize reward. This often is measured by a specific risk/reward ration. This is most evident when using equity stops but also applies to the other strategies of reducing risk as shown.