Often most of the time, you’ll find a number of new rookies coming into foreign currency trading. Both present and also future. The majority of them are desperately searching for the magic system that will make them a large pot of cash. For them, the one and only necessary element of beating the market is to find the best trading system available in market. Probably 90% of these rookies will not succeed, and it is not because they didn’t find a good system. Instead, they usually lose because they failed to recognize the value of money management as well as planning.
Expert traders, nevertheless, recognized the major element of why they succeed. So, what are the guidelines to ensure you’re within the winner circle?
1. Strictly Limit Your Risk On Each And Every Trade
The amount of your capital that you risk on every trade may differ according to the system as well as the amount of your funds, however, it should by no means, be more than 5%. Of course, 5% is extremely high. Unless you have a really small foreign currency trading fund for which you wish to build up rapidly and do not mind if you lose it, you might be better off sticking to about 3%.
If you have large fund, most likely you’ll discover that you wish to reduce the percentage risk. If you’ve abundance of money inside your account, you want to make absolutely sure that you don’t lose it all, even in the worst of the losing runs. Nearly all traders at this particular stage will risk just 1% of their capital per trade.
2. Give some thought to Your Risk To Reward Ratio
A specific issue in common for numerous traders is that they never even consider about the relationship between the risk for which they are taking and the possible reward. Fair enough, they keep their risk to a reasonable percentage but they only take a small profits from each trade. They’ll even be risking more than they expect to profit (For example, risking 60 pips to make 30).
Usually, this is no longer a successful strategy in the long term. It may perform in theory if you have a system that creates an extremely high percentage of winning trades but the result of getting a few losses in a row will be devastating. Hence, choose a system that has a risk to reward ratio of around 1:2 (For example, risking 30 pips to make 60).
3. Don’t Open Another Trade Until The Initial Trade Is In Profit
No matter confident you’re about your 1st trade, do not open a second position until the 1st trade is actually in profit and you have moved your stop, up on top of the break-even point.
There are actually two explanations for this. The first is that if your first trade suddenly takes a dive, you’re likely to be in a stressful position and having to deal with a second position at the same time could lead to panic decisions.
The second reason is that with multiple unsecured trades, you are very vulnerable to a sudden unforeseeable market event for which could cause the prices to dive in the wrong direction and trigger all of your stops at once.
In conclusion, stick to the guideline of trading your positions strictly to ensure that you keep a good grip on your earnings.