Forex trading is difficult for beginners. It’s associated with high risk of losing money. Therefore, so that the account balance does not start approaching zero, novice traders need to master risk management, which is the foundation of asset trading. Moreover, the rules will be different for long term positions and day trading.
Trading without a strategy is like playing in a casino
Traders’ success will depend on how well they master money management in Forex markets. In order to generate income for a long time, traders need to develop a long term strategy that yields a stable positive result.
Often, beginners start trading without any strategy, which is why they lose money. To avoid this, you should master risk management. Confident possession of this skill does not guarantee one will trade with protection against losing money, but it will help reduce the amount of risk in investment trading and trading Forex.
In this article, you will learn what Forex money management is, why it is so important to achieve winning trades, what benefits it brings to Forex traders and why you need PAMM and MAM accounts.
What is money management?
Money management is a system and a set of methods aimed at increasing capital or, in other words, profiting from investment or trading. This system also includes management of risks that arise when working in foreign exchange markets. Trading system skills show how well a trader controls risk per trade, manages their investments and uses trading instruments.
Without knowledge and experience, a beginner is likely to lose their money, so haphazard trading is dangerous for a beginner Forex trader. The good news is, basic money management skills are easy to master. Start by mastering simple rules that will help reduce the risk of encountering losing trades.
Principles and techniques of Forex money management
If you want to make trading in the online Forex market profitable without risks, the only way is to trade on a demo account. Most brokers offer this option. This means you can learn, test and use trading strategy to trade better in the markets and increase your skill. Only after the strategy is successful and the percentage of increased winning trades increases can you proceed to trading using a real account.
Don’t expect immediate success
Trading will require patience; professional development never stops. It is an ongoing process, and the results depend on it. Over time, traders develop personal principles based on personal experience, but first, you should study the generally accepted rules. Here are a few money management principles in Forex that will help you avoid common mistakes, reduce risks and improve your trading strategy.
Set the goal
The goal defines the methods and means. First, define the goal itself. This way you can track your progress and estimate how long it will take you to reach your goal. If you want to buy an expensive mansion in ten years, it won’t be enough for you to save $ 100 every week and indulge in a single trade a day from time to time. In fact, you will have to put in a lot of effort and invest large capital.
The approach will be specific for each goal
Investment of large sums can result in a strong capital increase in a few years, but using smaller sums will be enough to achieve the desired standard of living. Each case will require different approaches and tools. For example, in day trading, stock investors put more emphasis on technical analysis while investors are more focused on fundamentals. Timeframes, parameters and chart settings will also differ.
Now we move on to the next principle of money management in Forex, which every novice trader should know: do not invest more than you are ready to lose.
Invest only free money
It is too risky for beginners to use large amounts. Trading is a discipline that requires cold analysis and ongoing learning. Traders should have excellent tools and knowledge of fundamental analysis as part of their skillset, which will help find profitable entry points to the market. Read books, articles, analytical summaries and other training materials on trading to master various money management techniques, apply them in your trading and compare their effectiveness.
It is better to achieve a higher reward ratio on a small balance sheet and periodically invest new money if trading brings good results
You can gradually increase your deposit up to $ 200, $ 500 and more. The main goal for a trader is maximum profit even with a small balance. When knowledge and skills in Forex trading are enough, and you are convinced that your strategies really work, the balance can be increased at least up to $ 10,000.
When managing capital, an increase in balance will be an additional advantage and provide more trading opportunities for diversification and averaging of positions with less risk per trade.
Diversify Assets
Diversification and averaging are two other important money management techniques. Diversification means you cannot invest all your money in just one asset. Some assets may lose value while others become more valuable. At such times, profits from some trades compensate for losses on others.
Manage risks
Assess the ratio of possible risks and rewards. This means that you need to understand what kind of a reward ratio you can per trade and what risks you are ready to take on. Based on this, decisions are made when placing orders. Comfort is important in money management. If the risks are too high, trading will become too stressful and negatively affect the results.
Strictly adhere to money management rules
Forex money management provides for maximum control over the risk per trade, so you should adhere to the rules of diversification, hedging and other methods to minimize possible losses. It is also necessary to choose a suitable lot size in relation to the total amount of funds available, especially if you are trading with leverage.
Avoid trading with high leverage
Trading leverage can double your deposit from a trade in a matter of seconds, but the risks will increase manyfold. The desire to quickly make a profit without proper practice can lead to a complete loss of money because when you’re trading with leverage, a margin call can happen: a situation when losses on a trade approach the amount of collateral. If the losses exceed the margin, then the position is liquidated, that is, it will close automatically, and the trader will lose all the money. Leveraged trading is for professionals only.
Psychological stability
Another factor required in trading is stress resistance. Before trading, you need to fully recuperate from tiredness, and in no case should you trade when tired or in a sick state. Make sure you are full of energy, and only then start trading. Forex trading requires maximum concentration. Slightest fatigue can lead to irreparable mistakes, especially for beginners.
Emotions are an integral part of our consciousness, and they determine a person’s motivation. In making decisions, people rely on both feelings and logic. But if you loosen your grip and give your emotions a lot of freedom in trading, they can help you lose money in no time. Emotion management is one of the main risk and money management techniques in the currency market.
To win, you need to learn to take control of your emotions
This approach will provide the right conditions for making decisions, and you will begin to clearly see the situation when trading on an exchange. In case you succumb to emotions or cannot cope with the psychological stress, it is better to interrupt trading and temporarily switch to another activity. Otherwise, a situation will arise that is tantamount to a loss in gambling, when the player tries to win back the lost bets, losing even more money.
Set a Stop Loss
A Stop Loss is an indispensable tool in Forex money management systemы. Trading without a stop is not a good idea. By setting a stop loss, you are giving yourself the assurance that you will not lose more than you allow yourself to lose. When the price reaches the stop loss level, the order will be placed at the price specified by the trader and immediately executed.
There is no need to hope that the price will not fall and the position will not result in a loss. The stop loss order will be executed in any case if the price reaches the specified value. Even if during your absence the exchange rate falls by 80%, your position will be closed at the level that you specified.
Trailing stops
There is also a trailing stop, but not all brokers support this type of order. A trailing stop order means that the order will automatically move higher with a percentage step set by the trader. This will continue as long as the price moves in the expected direction. Otherwise, the stop will be triggered and the order will be closed.
Plan entry and exit points in advance
For a reference point, you need to know another rule: determine in advance not only the entry points to the deal, but also the exit. In addition to stop loss orders, traders can set take profits, with the help of which they take a fixed profit. It often happens in the market that the price reaches a certain level and then rolls back. The investor misses the profit, and they have to wait for the next opportune moment to close the position.
Take a look at how some brokers allow you to set both stop loss and take profit orders at the same time. This provides additional benefits in terms of money management, since you control not only potential losses, but also profits.
Be Consistent
Chaotic trading is another common mistake novice traders make. When traders change several strategies and do not adhere to anintended sequence of actions, this is a path directly to a complete loss of the trading account balance. The best method is to follow a strategy in a disciplined manner and follow the steps consistently.
It should be noted that the rules of Forex money management are closely connected. If at least one element is removed from the mosaic, the picture becomes incomplete. The same with trading: if you ignore one or several rules at once, the outcome will be worse.
Don’t be limited to just one tool
Every professional trader has their own style that they developed over the years. You can achieve the best result if you use an integrated approach: combine strategies, select effective ones and abandon those that do not work, use different tools for the same goals. In other words, choose the right ways to achieve your goal.
It is also important to understand that a Holy Grail is an almost unattainable luxury. An experienced trader must learn to adapt to a changing market that is volatile and unpredictable. Money management strategies involve constant development and searching for new approaches that will help reduce risk per trade and increase profit from transactions (in other words, to optimize one’s trading system).
What are PAMM and MAM accounts
Many traders prefer not to go through a long and complicated process of learning to trade and money management and choose other ways. They may also do this for other reasons: lack of time due to high employment or fatigue after work. But at the same time they have sufficient capital for investment. One of the methods suitable for them is trust management. Investors donate their money to professional managers and receive passive income if qualified traders trade profitably.
The opposite situation arises when an investor has enough experience in trading Forex and knowledge of money management, but does not have enough personal funds for a more significant capital gain. Then they can attract funds from other traders and manage them, helping other people earn. At the same time, a qualified player charges a commission on the profits. This will serve as an additional motivation since there will be no remuneration for losses. In addition, the more total funds, the less personal losses the one in charge of the funds will experience, which is one of the main tips when it comes to Forex money management.
What is PAMM?
PAMM modules have been designed for this very purpose. These are special trading systems belonging to brokers which are designed to manage multiple investor accounts (investors’ rights reserved and protected).
In contrast to a conventional asset management system, PAMM accounts allow you to trade investors’ assets without having to transfer them to a manager. That is, depositors’ money does not leave their own accounts, but the manager can trade them.
How do brokers interact with PAMM accounts?
Brokers ensure the security of the platform and favorable conditions for all parties. They often keep detailed statistics of Forex traders so that investors can find and select the right manager for them. Everyone follows the rules of money management strategy in different ways: some trade more aggressively, as a result of which they get high profits, but also a strong drawdown of deposits, others – more moderately. The second type will have less profit, but the series of losses are not as significant.
What is the difference between PAMM and MAM accounts?
These work according to the same principle: a managing trader connects the investor’s account and trades funds. But MAM accounts allow you to cancel all orders and close positions, and then turn off the trading account at any time. PAMM accounts have a minimum trading period (rollover), during which the trading account holder cannot influence their funds in any way.
What are PAMM and MAM accounts for?
PAMM and MAM trading accounts can serve as a good alternative to trading on demo accounts, but basic knowledge of money management will still be useful. You must recognize a bad trader and be able to evaluate their trading style in order to understand if they can be trusted with your account balance.
In the course of trading, you can study and analyze the transactions of the managing trader, taking into account the peculiarities of their trading, mistakes and accuracy of following money management strategy.
Summary
So, the rules of money management help many traders control possible losses and risks, better understand the principles of the structures of financial markets, improve trading experience and bring it to a new, previously unattainable level.
The risks should not exceed the potential profit on Forex markets, therefore, it is necessary to follow money management rules and carefully think over each transaction to avoid losing trades. Your trading result shows how good you are at money management, including emotion control and diversification, and following its rules. The result will come with experience.
