The Novice Forex Trader Needs To Manage His Money Carefully

Before you start trading on the foreign currency market it is crucial that you take the time to learn the ins and outs of markets and that you begin your Forex trading with a very clear philosophy and a defined strategy. Then, once you begin trading it is equally vital that you manage your trading funds with great care.

As well as knowing which currencies you should trade and being able to recognize entry and exit signals to trading, the successful Forex trader has to be able to manage his resources and to incorporate money management into any trading plan.

There are numerous different strategies that can be applied to money management, but the majority of them will require you to keep a track of what is known as your core equity. Your core equity is defined as the sum that you begin trading with less the money that you have in any open positions. In other words, if you begin trading with $15,000 and have $1,500 in open positions then your core equity is $13,500.

In general, when starting 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 keep your risk to $1,000 to $3,000 and, to be safe, should ideally start at just $1,000. This can be achieved by placing a stop loss order 100 pips (1 pip = $10) above or below the position at you enter a trade.

Over time your core equity will rise or fall and you can simply adjust the dollar amount of your risk. Looking at our example above, with a starting balance of $15,000 and one position open, your core equity is $13,500. If you then open a second position, your core equity will drop to $12,000 and you should limit your risk accordingly.

On the same basis, as your core equity increases rises, you can also raise your level of risk. So, 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. Alternatively, you could also decide that you are going to risk more of any profit made than you are prepared to risk from your original starting capital. You could, as an example, risk up to 5% of any realized profits ($5,000 on a $100,000 lot) giving yourself a higher potential for profit.

The secret to making money in Forex trading relies on several factors and one extremely important part of your trading strategy lies in your ability to tightly control and manage the money that you have available for trading.

Learn Forex trading online and discover the benefits of Forex mini trading at LearningForexTradingOnline.com