Forex Traders and their Money Management Basics
June 28th, 2008 | 
Author: 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.
Posted in Forex
Money management is very important in forex trading because we use margin in it.
I just want to say, do not enter in Forex trading with last money in the pochet or dont sell your car. Its a good change to earn extra. At least if you dont earn anything you will enjoy it as a game
the concept used by forex traders is awesome.because i will never feel boring if i take it as a game.but they are professional.
Monay management is very important. Nice post
People don’t know how to manage their money, this is what they should learn.
Thank u for the info about Money management,as it is very important in forextrading.
Of course one needs to be careful when trading on forex. If done with the necessary restraint it can be a great investment
Sometimes Currencies behave in a very awkward way. I was just comparing 2 pairs, US/RS(Pak Rupee), and US/EURO. I was shocked to see conversion behavior. Price of Dollar is rising twice for “pak rupee” as compared to Euro so it will be a good conversion to purchase US, then sell them in Pak Rupee, and then sell again Euros. I think this can be very fruitful and beneficial.
Money management is very important. great post.
There is a lot of turmoil in the market during the presidential election periods.
Currencies, forex, and stocks are so unpredictable in these days that I have withdrawn all my money from all my campaigns. I think it is a time just to sit, relax, and observe.
Agree with Arne, best place for money at the momment is under the bed, stock market is down, gold and oil all took a hit this week and with banks tightneing up on lending criteria, mortgages are also hard to find. Not sure I want to get invovlved with hedging, but you make it sound good.
Hey. Your right, money management is paramount in the forex game. As with any sort of professional gambling, it’s imperative to work with a solid bankroll.
Forex is the new thing the past two years, and they say it’s the business for the people who have no business. I think the best thing is to keep forex a side business, because you never know when you can hit rock bottom.
Start small. Test different trading systems. Once you find one, go big!
Money management is key to win, because winners not only win, he don’t lose big money.
Some very helpful insight for the novice trader. Hopefully they will find it, read it and put it into use. Thanks Bill
I think you really need to know what you are doing in order to do Forex trading. Otherwise you can lose a lot of money. They have these forex trading games online you can try to see what it’s really like.
Great Information.I found your site very interesting With the right information.
Money management in forex trading is the number one factor that will determine your success or failure. If you are trading forex without stops on your trades and without proper money management rules in place you are almost destined to fail.Thanks!!
In fact money management is one of the most crucial skills to acquire. Unfortunately most people think that picking the direction as more important than money management. Without proper money management, we could be right 9 times out of 10 and yet still go broke. Look at Jesse Livermore.
I think it is a decent strategy, but really have to be careful with forex trading. I am not too educated on it, but I have heard some horror stories.
I think I will try and get into forex trading and see if I can make tons of money. Thanks for sharing this.
It is nice to hear about money managment, Really great advice, Actually, I am a younger here, want to move into e-Business related to web design and etc, so, I just want to put my foot into forex too, So, I just googled to get some info & got your page full of advice to a newbie, Thanks a lot friend,
Good post. Forex trading is very risky as well as profit pulling
I agree with free daily forecast forex.. Starting small is a must. After you find the one you can go big.. but just stay small for a bit.
Money management is very important.
Good post! Forex is a full time job. If you turn away for too long, you loose it all!
I find this article informative…thank you for clearing things up regarding about money management .
btw, i agreed with katya: ”do not enter in Forex trading with last money in the pochet or dont sell your car.”
Forex is the largest and most liquid market there is but its not to be taken lightly. there are many great strategies one of the best is to be a seller not a buyer. Sell offs are fast Chaotic events (thats why they wipe people out!) So instead of getting wiped out…trade them.
Lee young at the currency cafe has been using this strategy for almost 15 years and makes his living at it. There are no safe strategies in Forex but you can stack the odds.
money management is first rule in forex market.thanks for article.
The posint is Big wins and small losses. This is really the key. Also You have patient to follow Your trading plan.
Forex trading is definitely a recession proof business. Because of the volatility of the currency, it allows the traders to make money in any direction depending on whether you buy or sell the currency.
If you are really interested in making money from forex, you got to spend some time to read up on it.
The best way will be to read some forex books, then attend some forex courses and then trade the demo account until you become profitable.
Then you start to trade live with your hard earn money. I managed to quit my day job to become a full time forex trader and I am still making money at this time when the stock market is crashing and recession.
So I seriously believe that forex trading is a right choice for me and it will be for you too.
Great Resource. Thanks a lot for all the information provided. Very useful. I too run a finance website and hope it helps you guys.
Cheers.
That’s a nice suggestion to earn money through this financial crisis every country is experiencing around the world.We have to be creative and try what we think is best and forex trading could a great option.
Simon Leach is a fraud. Lee Young is a fraud.
See these links:
http://thelonelytrader.wordpress.com/2009/05/29/the-lonely-trader-has-been-duped/
http://thelonelytrader.wordpress.com/2009/06/02/lee-young-epilogue/
The currency cafe is a turn and burn operation. Lee has not been trading FX for fifteen years. He trades a $14M demo account and tells you it is a “hedge fund”.
He has left a trail of wreckage that extends from San Diego to Virginia.
For a site that calls itself “SMART divas”, I sure hope you all get it.
Simon, you’re cooked brotherman.
Anyone has any questions:
jay @ LonelyTrader DOT com
It’s not easy and really risky. Better start with simulation account first to see how your strategy works.
It’s a cool post and I always worried about all the frauds and scams over internet. I was very keen to take part in niche but all those threats refrain me to do this.
Agreed. I wouldn’t play in the forex market w/o stop losses or hedges. Glad you mention those. The leverage can lead to great gains, but it can also wipe you out just as fast.
I use Etoro broker Its great and they have great platform nice post and thanx sharing ur knowledge
Its an interesting content, moving different from trend is not an easy thing, market research and analysis along with formulating the trading strategies requires constant effort and focused approach. The points in the content related to leverage is a useful one and I agree with that point. Leverage is useful to make position and earn big but at the same time it is responsible to loose big as well because while trading if traders do not manage their leverage amount then they can be in big trouble.
very much information about forex that I get from you, I hope I can jump into the forex world better, thank you
Thank you for this post.
If we are really interested in making money from forex, we got to spend some time to learn about it and make some testing.
Best regards From Portugal