Before you begin to trade on the Forex it is vital that you take the time to study the currency markets and that you begin your Forex trading with a very clear philosophy and a definite strategy. Then, once you begin trading it is equally vital that you manage your trading funds with the greatest of care.
In addition to knowing which currencies you should trade and being able to recognize entry and exit signals to trading, the successful foreign currency trader must be able to manage his financial resources and to incorporate sound money management into any trading plan.
There are a number of different strategies that can be applied when it comes to money management, but the majority of them will require you to keep a track of your core equity. Your core equity is the sum that you begin trading with less the money that you have in any open positions. In other words, if you begin trading with $15,000 and have $1,500 in open positions then your core equity is $13,500.
As a general rule, when starting out you should try to limit your risk to no more than 1% to 3% of every. Thus if you are trading a standard Forex lot of $100,000 you should keep your risk to $1,000 to $3,000 and, to keep yourself safe, should probably start at just $1,000. This can be achieved by placing a stop loss order 100 pips (where 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. Looking at our example above, with a starting balance of $15,000 and one open position, 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.
Using the same principal, as your core equity increases rises, you can also raise your level of risk. Consequently, if trading is going in your favor and you have made a profit of $5,000 your core equity is now $20,000 and you could raise your risk to $2,000 per transaction. Alternatively, you might also decide that you are going to risk more from any profit made than you are prepared to risk from your original starting capital. You might, as an example, risk up to 5% of any realized profits ($5,000 on a standard $100,000 lot) giving yourself a greater profit potential.
The secret to succeeding in foreign currency trading relies on many factors and one very important part of your trading strategy lies in your ability to manage and control the money that is available for trading.