The Novice Forex Trader Needs To Manage His Money Carefully

Before you begin to trade on the Forex it is crucial that you take the time to learn the ins and outs of markets and that you begin your Forex trading with a clear philosophy and a defined strategy. Then, once you begin trading it is equally vital that you manage your trading funds with great care.

As well as knowing which currencies you should trade and being able to recognize entry and exit signals to trading, the successful foreign currency trader has to be able to manage his resources and to incorporate money management into his trading plan.

There are many different strategies which can be applied when it comes to money management, but the majority of them will require you to keep a track of what is known as your core equity. Your core equity is defined as the sum which you begin trading with less the money which you have in any open positions. So, if you begin trading with $15,000 and have $1,500 in open positions then your core equity is $13,500.

Generally speaking, when starting out you should try to limit your risk to no more than 1% to 3% of each trade. Thus if you are trading a standard Forex lot of $100,000 you should limit your risk to $1,000 to $3,000 and, to be safe, should probably start at just $1,000. You can achieve this by placing a stop loss order 100 pips (1 pip = $10) above or below the position at you enter a trade.

Naturally over time your core equity will rise or fall and you can simply adjust the dollar amount of your risk. Taking our example above, with a starting balance of $15,000 and one position open, your core equity is $13,500. If you then add a second position, your core equity will drop to $12,000 and you should limit your risk accordingly.

On the same basis, as your core equity increasesrises, you can also increase your level of risk. Consquently, if trading is going in your favor and you make a profit of $5,000 your core equity is now $20,000 and you could raise your risk to $2,000 for each transaction. As an alternative, you could also decide to risk more of any profit made than you are prepared to risk from your original starting capital. You could, as an example, decide to risk up to 5% of any realized profits ($5,000 on a $100,000 lot) giving yourself a higher profit potential.

The secret to profiting from Forex trading relies on several factors and one extremely important part of your trading strategy lies in your ability to manage and control the money that you have available for trading.

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