By Harry Brown
In the foreign exchange market, commonly known as Forex, traders buy and sell foreign currencies with the intention of profiting from the fluctuations in exchange rates. Though traders have a lot to gain from this market, it’s easy for beginners and even experienced traders to lose track of their capital and experience a series of losses that they cannot recover from. It is essential for all Forex traders to have a money management strategy setup before they start making transactions. This involves setting barriers on risk and leverage. It also requires traders to organise and analyse their gains and losses so they are always aware of their financial situation.
To begin, all Forex traders must determine their own risk profile. It is up to you how much money you’re willing to risk on a trade. By knowing your limits, you don’t give yourself any room to make reckless transactions. Beginner traders may want to limit themselves to just 1-2 per cent of their capital per trade. If you risk more than this, a single transaction could potentially put you in a position that’s difficult to recover from.
Another issue involved in money management is leverage. Leverage in the Forex market refers using borrowed capital for trades. Though leverage may allow you to make trades you couldn’t have afforded otherwise, it must be balanced carefully so that you don’t find yourself relying too much on borrowed money. For example, it is often recommended that Forex traders do not leverage more than 1/5 of their capital. Traders that leverage too much suffer amplified losses when a trade does not go in the direction they predicted.
Once you have set barriers for risk and leverage, it is important to implement a system to keep track of your gains and losses over time. Traders can keep a daily log of their transactions and keep all their trading data on a Forex money management spreadsheet. Though the process of recording trades may seem quite basic, it is one of the most important practices a trader takes part in. Traders can also consult financial experts who specialise in the Forex market and provide money management tools for their clients.
Thus, forex traders can manage their money by having a clear understanding of their risk profile, by using leverage carefully and by diligently recording their transactions. Though traders have much to gain from such a liquid market, money management is crucial to their success.
The author of this article is a part of a digital blogging team who work with brands like Saxo Bank. The content contained in this article is for information purposes only and should not be used to make any financial decisions.