37. Forex Trade management rules

When you enter into a trade, you either win it or lose it. Very much obvious. Isn’t it? Do you really think about how you are going to manage a trade in either of these cases? That is called trade management. Whether the conditions are favourable or not you need to have a plan in mind to manage the trade. You should be knowing when to exit the trade. Two different traders who enter into the same trade may have different profit and loss. This depends on how each one of them manages the trade.

article37_1Risk is unavoidable in a trade. But a trader has to know the risk and manage his trades. So, the key is you should have a plan well ahead to manage the win or lose situation appropriately. You should be prepared to handle every situation that arises as part of the trade you are getting into. Think about it and plan accordingly. Here is a list of some of the factors which you would want to think about when it comes to trade management or money management.

Risk Percentage

Always follow the 1% or the 2% rule. This means you should not expose more than the risk percentage you choose to follow for your trades. The idea here is pretty simple. Do not risk too much on your trade. This is mainly applicable when you are a beginner in the Forex Market. Suppose you have $10,000 in your account and this is all you have. If you go and risk this $10,000 you are in trouble. What if you incur a big loss or your broker is bankrupt and doesn’t return your money back. So instead of using the whole money, think of a percentage of this account which you can afford to lose and go ahead with that. This way you make up your mind that you are prepared to lose a particular amount and hence you won’t feel emotionally down in case you lose.

Choosing the leverage

Understand the concept of leverage well before you fall for the high leverage ratios advertised by the brokers. Leverage ratios are represented as 1:XYZ. For example 1:500, which means you can increase your trading capital by 500 times. Thus with leverage you can increase your profit by huge amounts, at the same time it can equally bring your account down if you don’t manage your trade efficiently. Choosing a high leverage can be very risky. When, used appropriately leverage can fetch you lots of profits.

Risk to Reward Ratio

This is another factor which signifies that you should not risk more than what you gain out of the trade. For example, if you risk 20 pips, make sure you at least get 40 pips as the reward. In this case the risk to reward ratio is 1:2. So, when you win more than you lose you will definitely be profitable.

Position Sizing

Due to high leverage, setting the wrong lot size can be really devastating at times. Position sizing is another important skill to be learned by the Forex traders. It is an important factor for risk management. With everything else in place a wrong lot size can really hit you hard. Appropriate use of stop losses can be really beneficial when you want to determine your lot sizes.

Learn trading strategies

Keep practicing with your demo trade account until you are confident enough to open up a live account. Try out various trading strategies and analysis techniques. Learn to make use of the leverage and risk percentage rule. Continuous learning will help you manage your trades efficiently.

Trade management or Money management is an important factor that determines how good a trader you are. Most successful traders invest a lot of their time to do the research and come up with a trade management plan well before they enter into the market. This is because, the more time you spend to analyze yourself and form a plan of what you want to achieve, the more likely it is that  you will be profitable.

Money management should be should be planned well in advance even before you start doing live trades. Keep implementing the management rules you decide upon and in the long run you will see that you have learned to effectively manage your trades.