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The Novice Forex Trader Needs To Manage His Money Carefully

By: Don Saunders Before you begin to trade on the Forex it is vital that you take the time to learn the ins and outs of markets and that you start your Forex trading with a very clear philosophy and a definite strategy. Then, once you start trading it is equally vital that you manage the funds available for trading with great care.

In addition to knowing which currency pairs to trade and having the ability to recognize entry and exit signals for trading, the successful Forex trader has to be able to manage his resources and to incorporate money management into any trading plan.

There are numerous different strategies that can be applied 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 that you start trading with less the money that you have in any open positions. So, if you start trading with $15,000 and have $1,500 in open positions then your core equity is $13,500.

As a general rule, when you first start out you should try to limit your risk to no more than 1% to 3% of each trade. This means that 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 your entry position for a trade.

Over time your core equity will move up or down and you can then adjust the dollar amount of your risk. Taking our example above, with an opening balance of $15,000 and one position open, your core equity is $13,500. If you then open 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 increasesrises, you can also raise your level of risk. So, if trading is going well and you make a profit of $5,000 your core equity will rise to $20,000 and you could raise your risk to $2,000 for each transaction. As an alternative, you could also decide that you are going to risk more of any profit made than you would be prepared to put at risk from your original opening capital. You could, for example, decide to risk up to 5% of any realized profits ($5,000 on a standard $100,000 lot) to give yourself a better profit potential.

The secret to making money in Forex trading relies on several factors and one extremely important element of your trading strategy lies in your ability to manage and control the money that is available for trading.