Saturday, August 18, 2012

3 Keys for Successful Money Management

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Poor cash management is one of the causes behind the failure of most forex traders. If you’re not convinced, just check out how much time is spent by both industry experts and newbies on this topic.

Experts cite money management as the virtue that any trader needs to succeed in the forex market. Some beginners reveal how they lost money when they ignored this important aspect of forex trading.

Trade with the protection of your capital as your primary concern; otherwise you will not survive in the forex market. It makes sense without being complicated - risk only a small percentage of your total account so that you have enough funds to use for other trades in case of financial loss. Simply put, it is true to the maxim “don’t put all your eggs in one basket” or you may lose everything or nearly all of what you have. Some propose a maximum of five percent per trade while others recommend a little less or higher than this.

Maintain a Healthy Risk to Reward Ratio
Your chance of losses should be lower than your chances for profits; otherwise, do not trade. Do not consider selling nor buying as an option. Preferably, you should have a risk-to-reward ratio of 1:2 or as high as 1:3. Ultimately, you will benefit from not risking more than you can potentially make since it will significantly further your chances for stable profitability.

These are three tried and tested approaches to taking care of your money in forex trading:
Minimize Trading to a Small Percentage of Your Account

What exactly is money management in the context of forex trading? It is controlling the flow of money in and out of trade with the foremost objective of minimizing your exposure to risk. Poor management, therefore, simply means wagering with your investment and exposing it to high risk. Many investors often forget that this is a very critical part of a system or strategy.

Cut your losses short, let your profits run. Some traders lose more cash than they should as a result of “waiting for the market to turn back around.”  Get out of a trade while your losses are still small. If you’re gaining profits, don’t be overcome by greed and close the trade right away.  Many traders know for a fact that by getting out early in the game (as soon as they make money) they could lose the chance to earn much more profits if they stayed.

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