Forex market is a big market and every single trader wants to be successful. However, only 3-4% of traders are successful in this industry. No matter how good your technical and fundamental knowledge is, without proper risk management you will end up losing your capital. As the Forex market is purely connected with money, rookie UK traders must make a strong money management rule which he has to follow strictly. A trader can have the best strategy in the world, but if he doesn’t fix his risk per trade and the ratio of risk-reward, nothing can stop him from losing his investment.
In this article, we are going to talk about a few money management rules. To become a successful trader, you must follow these rules.
1. Fix your risk per trade
Before you open a trade, you have to decide, the amount of money you are ready to lose for that trade. By doing so, a trader can ensure that he is not going to face disaster due to multiple losing trades. A smart trader never risks more than 2% of his trading account in any trade, but for a new trader, it has to be lower than 2%. When you fix your risk per trade, you also need to optimum position size for each trade.
Let to calculate the lot size effectively. The pro traders at Saxo Bank never trade big lot even though they can take advantage of the leverage. Use a fixed lot at the initial stage so that you don’t have to deal with complicated calculations.
2. Always set stop losses
By setting stop loss in any trade, you can ensure, your account not going to blow up, even though the market goes against you. A trader can never have a 100% win rate, so setting up stop loss in trades can prevent you from losing the investment in a few trades. One thing a trader should keep in mind before setting up a stop loss that, he should give the market some space to breathe. Due to the high level of volatility, the trader should not use tight stop losses. The stop losses level has to be set according to support and resistance level, market trend and the volatility of currency pair.
3. Set a risk-reward ratio for each trade
Before opening a position in the Forex market, a trader should fix the amount of profit they want to get from that trade. Setting up a take profit level is as important as setting up a stop loss level. The risk-reward ratio is the ratio between the amount of risk and the amount of profit you are going to make from a trade. A trader should stay away from trading without a set risk-reward ratio.
4. Never trade based on emotions
As a trader, you have to be emotionally strong, so you can take the hit of the market easily.Many traders move their stop loss levels frequently because of the uncertainty in the Forex market and close a profitable trade too early. A trader has to be confident with his analysis and entry-exit level. You have to let the market determine your fortune.
5. Keep a trading journal and review it
Whenever you open trade notes the key reason for opening that trade and reasons for the risk reward ratio. Analyze the notes frequently for finding out the glitch in your money management rules. Fix those issues and start working hard to create a robust risk management policy. But never listen to emotions even though you can recover the losses with one big trade.
Money management is the most valuable technic when you are trading in the Forex market. The different aspects of money management technics cannot be described in one article. We have just talked about some key points of this technique which will give you some idea of the importance of money management in this industry.