Money Management in FOREX Investing
Learning about money management in the world of FOREX is an essential tool that will help you steer clear of trouble. Mainly, money management pertains to a set of principles that you can apply when making investment decisions. These rules enable you to build a discipline that can help you to protect your investment capital while maximizing your potential for profit and gain.
So, here are 10 rules which can help you make the most of your investment dollars in the FOREX market.
- Stay clear of any software, programs, or platforms that guarantee results. This goes without saying. Nothing is guaranteed in life. Yet, you will find that there are programs and companies that tout their platforms, programs, systems, and so on as guaranteed money-makers. The only thing that can guarantee you solid results is good, old-fashioned study and dedication to trading. Please be careful as so-called gurus and experts may offer you the keys to the kingdom for a low price. These are generally scams that, in the best of cases, will only leave you with subpar results. So, please be wary of any trading system that offers amazing returns in a short time period.
- Make use of a demo account. Any reputable FOREX platform will offer you a free demo account loaded with monopoly money. Make sure that you take full advantage of this account. Not only will it help you to learn the ropes of the platform itself, but you can also practice as much as you can without the worry of losing any real money. If anything, you can go wild and try out any number of strategies before going live. There is no better way for you to learn how to trade without the risk of losing your initial investment. We have mentioned this point several times. It is so important that it’s part of the rules of money management.
- Avoid involving emotions. This is arguably the most important rule. The reasoning behind this rule is that getting emotionally involved can backfire on you. Whether you are winning or losing, when emotions get the best of you, you open up yourself to taking on risk you normally wouldn’t take. So, if you are upset after losing out on a deal, it might be best to push back from the table and take a break. There is nothing with catching a breather, especially when things aren’t going your way. Please remember that keeping a level head when trading in any market is one of the cornerstones to making sound investment decisions. Sure, we are all human and get emotional. But if you let your emotions dictate your strategies, then you might be setting yourself up for trouble down the road.
- Don’t be stingy on a good education. When it comes to studying FOREX, don’t cut corners with your time and your efforts. You don’t have to spend a great deal of money. All you need is to invest time and effort into learning as much as you can about investing in FOREX. Most importantly, please keep in mind that this is an ongoing process. Books such as this one, are a valuable means of improving your trading acumen. There are also other publications that you can provide you with information that can be useful at any given point. Additionally, there are training courses out there which you can take on major learning platforms. These courses are not endorsed by any specific platform or broker. So, you can be certain that you are going to receive unbiased information.
- Being successful at FOREX is something that you can learn. Being successful at FOREX isn’t something that you can just pop out of a box. While it takes time to master the market, it is something that you can totally learn. That is why no system can guarantee to be foolproof. While you can use systems out there as a guide, you need to take the time to make sure it’s the right system for you. Please keep in mind that all skills are learnable. If you have the chance to learn from experienced pros, so much the better. The main point here is to make learning a lifelong journey. You will find that there is so much more to learn in the world of investing. In fact, don’t be surprised to find that when you thought you knew everything there was to know, something else comes up that expands your current knowledge base.
- Manage your funds wisely. A good rule of thumb is to never invest more than 2% of your investment capital on a single deal. When you do this, the problem is that it opens up the door to a great deal of trouble. For example, if you go all-in on a single deal, you run the risk of blowing your entire capital. This would not only be devastating, but you would be broke afterward. Please take care of your investment capital as much as possible. Even if you are just starting out with a few hundred dollars, your investment capital is highly valuable. So, blowing it all irresponsibly makes no sense. The 2% rule is an iron law that will help keep you in the race all the time.
- Spread the wealth. While you might feel comfortable trading certain currencies, it’s important to branch out and explore other potential currencies. You might be surprised to find that there is money to be made in various types of currencies. Often, most investors overlooked hidden gems such as those countries whose currency is gaining value. This is why fundamental analysis is always a great way you can sniff out a potential deal. Please keep in mind that diversification is the name of the game. This is especially true when you’re dealing with uncorrelated pairs. You will find that these pairs offer the best hedge against the risk that comes with putting all of your eggs into a single basket.
- Common sense always wins. When you look at potential deals, or experts claiming to have magical formulas to great returns, use your common sense. This is especially true when you think about something being “too good to be true.” In such cases, common sense would dictate a more cautious approach. In addition, if you have a gut instinct telling you that something is not right, it’s always best to err on the side of caution. If you find that the data just doesn’t seem to back your assumptions, then you might be better off sitting on the sidelines. In FOREX, it’s better to prove yourself that you were right, even though you didn’t get into the trade as opposed to getting in just to find out you were wrong. The good part about sitting out is that you then have experience which can serve later on.
- Hedge risk as much as possible. The use of stop-loss orders must become your new go-to device whenever you enter a deal. The use of stop-loss orders will cap your losses up to a certain point. This will keep you from being wiped out in case a deal should happen to go sour at any point. This is why we keep reminding investors over and over about the importance of implementing stop-loss and take-profits points all the time. You might be tempted to take the auto-pilot off and fly solo, but please bear in mind that action can get hot and heavy. As a result, you may not have enough time to react. As such, you may end up losing out simply because you didn’t react fast enough.
Take care of overusing leverage. This is another one of those risky strategies that you need to keep in mind. When you make heavily leveraged deals, you are opening the door for disaster. So, make sure that if you do use leverage, you have found a manageable level that would ensure you don’t get wiped out should something not go right.
With these golden rules, you will come out ahead most of the time. While there are no guarantees in any market, you can be sure that you will have a good chance to come out ahead every time. So, do take the time to go over these rules again and again until they become second nature to you. In the end, you’ll find that the combination of theory and practical experience will help you build the killer instinct you need to be successful in the FOREX trading market. Ultimately, all the skills you need are perfectly learnable. Thus, please devote as much time as you can to learning and building upon your current skills.
