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Trading currencies on the forex market is an activity that is practiced all around the world by thousands of individuals from professional money managers working at financial institutions, to individual investors trading through online forex brokerages. Because forex trading can be a risky proposition, some common basic principles have developed among currency traders to better enable them to manage their money.

One tried-and-true way of managing one’s money is through the use of stop-losses. This risk-mitigating device is a sell order at a price beneath the original sale price, and if the currency falls to this value, the broker automatically sells it. It should be set at a low enough level that it isn’t mistakenly triggered by the normal daily fluctuations of the currency, but it is a great way to take some of the emotion out of currency trading. Often, an investor will hang on to a plummeting investment because he is emotionally attached to it, or because he feels that if he just holds onto it, it will bounce back. In the fast-paced world of currency trading, this is often not the best course of action, and it is usually better to get out of a falling position and try another tactic.

Another good money management technique is hedging. Forex traders can hedge their currency positions in a variety of ways, but the most popular are futures contracts and options. With these derivative investments, one pays a small amount of money for the right to buy an allotment of currency at a future date, at a set price. To hedge a long position, forex traders will buy these derivatives with the denomination in which the long position was taken, for the currency that was used to buy the original position. By reversing the order of the denominations, a fall in the long position currency will cause the trader to make money on the derivative, thus offsetting the original loss.

A mantra that many good forex traders repeat to themselves is to cut their losses short and let their winners ride. This philosophy is based on the fact that the main direction that everyone wants his investments to go is up. Any downward movement in the amount of profit incurred in a trade is a bad thing, and this momentum should be stopped as soon as possible by closing out the losing position, or cutting the loss short. Conversely, when the price of a currency is moving up and making money, the last thing one wants to do is stop this upward momentum by selling it. So, the trader lets the winner ride as long as it’s still moving in a positive direction. One should be careful to watch the position carefully in this situation though, and close it out as soon as the momentum shifts. A good way to ensure that this happens is to continually shift the stop loss upward underneath the rising price. By routinely setting this sell order just under the currency price, the trader can lock in any profits that have been made, while still allowing for any further upward movement.

By using various basic principles of money management, forex traders can increase their odds for success in the business of currency exchange. The use of stop-losses can both mitigate the risk of a currency that is spiraling downward out of control, and also allow upward movement to continue unchecked, ensuring that a profit will be made in this event. Hedging is another way that forex traders lessen their exposure to losses, often through the use of futures contracts or options. Those traders who properly employ these money management techniques give themselves a distinct advantage over the competition in the forex market.