In forex trading, there are two major aspects that determine the level of success that a trader can experience. The first aspect is the ability to get the direction of a trade right. The other aspect is the ability to manage your money the right way. You will need strict money management rules in order for your profitable trades and trading strategies to work. If not, you will be making money from your trading strategy only to lose it because of poor money management skills.
In this article, I will be looking at a few aspects related to money management in forex trading that you need for you to be more successful.
What is money management in Forex?
Money management in as far as forex trading is concerned refers to the set of rules that one observed for the purposes of maximizing profits, minimizing losses, and growing their capital. The benefits of money management are very obvious yet beginners tend to ignore this entire aspect and end up blowing their accounts after a brief period of trading. The process of trading involves a lot of decisions that need to be made and it is part of the reason why beginning traders find it quite easy to neglect money management and focus more on trading strategy.
Money management is meant to make you profitable in the future. Below, let us take a look at some of the skills that are necessary for proper money management in forex trading.
Avoid chasing losses
The first rule to proper money management in forex trading is the ability to resist the temptation to chase losses. Chasing the market is synonymous to chasing losses in gambling and it can be very tempting if you are one of those people who have trouble controlling their impulses. Chasing the market will have you trading even on low-probability trade setups, something that can lead you to even bigger losses. New traders find themselves in a situation where they open multiple trades at once with the hope of making a huge profit by the end of the day. Unfortunately, what this does is to lead them to heavy losses. This behavior seems more like gambling than trading and should be avoided.
Cut losses short and let profits run
As you become more accustomed with trading, you will learn to understand that it is always better to cut losses short before they accumulate. This means that when you see a trade starting to make losses, you should get out of the position early enough before the losses accumulate to huge amounts. On the other hand, when a trade starts to make profits, you should let it run into even more profits. You should have more faith in your trade setup and hope that it will make you more profit.
Unfortunately, inexperienced traders usually do it the other way round in that they get out of their profitable position too soon while leaving their losing trades run with the hope that things will take a turn for the better. As you trade more, you should work on two most important emotions in forex trading, that is, fear and greed. Once you control these two emotions well, you will become more profitable in your trading.
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