Before you start explaining the procedure of the advanced method of money management, it’s important to know about the basic money management policy. The majority of the Forex traders start trading with a very small amount of money, but by using the market leverage they trade with huge risk. Such an aggressive approach in the Forex market will never help a professional trader. You can’t even lead your dream life with basic knowledge of money management. In order to become a profitable trader, you must learn the advanced method of money management. Let’s dig deep to save our investment.
What is money management?
Money management is nothing but a way to limit your risk factors. The Forex traders always have to lose money on regular basis. Even the most experienced traders have to deal with frequent losing trades. In such a case, it’s obvious you can risk your whole investment in a single trade. If you do so, there is a high chance you will blow your trading account within a few weeks. In order to avoid such catastrophic disasters, the expert risk only a certain percentage of their account. The process of risking a small amount of investment in any trade is known as money management.
Knowing your limits
The amount of money which you can lose is not defined by the size of your account. You have to always know your limits of losing money. For instance, some the might feel comfortable losing 1000 thousands of dollars in any trade whereas some people prefer to lose $100. Based on your risk tolerance level you should scale your trade in the UK financial spread betting industry. Never think your luck will help you in real life trading. In fact, depending on luck is nothing but gambling. You should never invest any amount of money which you can’t lose happily.
Some of you might think you have a big account and you are comfortable to lose any amount in any trade. Such a mentality will eventually cause you huge trouble. As for the basic rules of investment, you should never take more than 1% risk in any trade. However, the experienced traders often risk more than 2% of their account balance to enhance their profit. Unless you have years of trading experience, you should never try such things in spread betting.
Scaling your lot size
The advanced art of trade management is not limited by predefined stop loss. When a certain trade goes in your favor, you should close the trade partially and book a certain portion of the profit. But this is a very sophisticated process and you must have a clear understanding about minor support and resistance level. However, by doing so, you are actually killing the risk-reward ratio of that certain trade. So what do you do to avoid such problems? Some traders often prefer to use trailing stop loss feature so that the risk-reward ratio is not killed due to minor adjustments of the entry and exit point. But always remember, such modifications in live trade is only for the experienced traders.
Money management is not only limited to risk exposure. How well you execute the trade is also related to your money management skills. Those who have very little experience, often face heavy slippage in the real market. This problem can easily be avoided by trading the market with ETX Capital. You should also ensure the safety of your trading funds. Never invest your money in a bad broker as they might scam you.
Your confidence level is also related to your money management skill. At times you will have to close the losing trades early. If you are certain that your running trade will hit the potential stop loss, don’t wait for it. Close the trade immediately and reduce your potential loss. You have to be an adaptable person to become a profitable trader.