As well as 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 sound money management into any trading plan.
There are many different strategies which can be applied to money management, but most of them will be based upon keeping a track of what is known as your core equity. Your core equity is defined as the sum which you start trading with less the money which 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.
In general, when you first start out you should try to limit your risk to 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 keep yourself safe, should ideally start at just $1,000. You can achieve this by putting a stop loss order 100 pips (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 merely 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 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 increasesrises, you can also raise your level of risk. Accordingly, 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 might 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 starting capital. You might, for example, risk up to 5% of any realized profits ($5,000 on a standard $100,000 lot) to give yourself a greater profit potential.
The secret to profiting from foreign currency trading relies on many different factors and one extremely important part of your trading strategy lies in your ability to control and manage the money that you have available for trading.
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