There are thousands of new beginners coming into foreign currency trading all the time now and most of them are desperately searching for the magic system that will make them pots of cash. They think the system is the only important factor in working out the best way to make money.
Probably 90% of these beginners will fail, and not because they didn’t find a good system. There are plenty of good systems. No, they usually lose because they did not understand the importance of money management and planning.
Professional traders, on the other hand, know how vital this is, and that is a major part of why they succeed. Here are 3 top tips to make sure that you are among the winners.
1. Strictly Limit Your Risk On Each Trade
The amount of your funds that you risk on each trade can vary according to the system and the amount of your funds, but it should never be more than 5%. In fact 5% is very high. Unless you have a very small foreign currency trading fund that you want to build up fast and don’t care too much if you lose it, you would be better off sticking to around 3%.
When your funds are large you will probably find that you want to decrease the percentage risk. If you have hundreds of thousands of dollars in your account you want to make absolutely sure that you do not lose it all, even in the worst of losing runs. Most traders at this level will risk just 1% of their capital per trade.
3. Think About Your Risk To Reward Ratio
Something that many traders never even think about is the relationship of the risk that they are taking to the possible reward. Yes they keep their risk to a certain percentage but they only take small profits from each trade. They may even be risking more than they expect to profit (e.g. risking 60 pips to make 30).
Usually, this is not a successful strategy in the long term. It may work in theory if you have a system that makes a very high percentage of successful trades but the effect of having a few losses in a row will be devastating. Choose instead a system that has a risk to reward ratio of around 1:2 (e.g. risking 30 pips to make 60).
2. Do Not Open A Second Trade Until The First Is In Profit
However confident you are about your first trade, do not open a second position until the first is actually in profit and you have moved your stop up above the break even point.
There are two reasons for this. The first is that if your first trade suddenly takes a dive, you are in a stressful position and having to deal with a second position at the same time could lead to panic decisions.
The second reason is that with multiple unsecured trades you are very vulnerable to a sudden unforeseeable market event that could cause the prices to dive in the wrong direction and trigger all of your stops at once. So keep to the rule of trading your positions singly to make sure that you keep a good grip on your profits.
Observing these three rules is the best way to make money with foreign currency trading.
The Forex Dude