Financial management in forex trading for beginners
Financial management in currency trading includes specific actions that you use to increase your profits, as well as reduce your potential losses. Successful forex trading for beginners is more about good money management than having a large number of good trades, and it is one of the secrets that separates those who trade in forex for the long term, and those who give up after a few hours. business deals.
For now, here are some money management basics to guide you in trading:
1. Decide how you will finance your translations in advance: Only one type of money is a good investment, and that is money you can afford to lose, preferably without harming your physical and/or mental life. Every winning trader wins in his own way, while every loser experiences a loss in the same way. Remember, take every opportunity available in learning to trade. It’s never ending the process!
2. Decide what investment level you want: One of the most frequently asked questions about forex trading is “How much do I need to start trading?” For beginners forex trading, it is good to start with small trades and increase your chance of getting to the top. Fortunately, many reliable trading companies have a reasonable minimum deposit requirement to open an account. At Admirals for example, the minimum deposit amount is 200 euros. Be wary of trading companies that offer bonuses for certain levels of deposits, as these can be scams, as it is very difficult to withdraw your money after it has been deposited.
3. Calculate the risk: Make sure to calculate the amount of risk before trading. If the potential profits from trading are less than the potential risks, it probably isn’t a good decision. You can assess your risk with our free forex calculator.
4. Determine the profits needed to cover any losses: In addition to calculating the risk before any trade, it is also useful to calculate how much you will need to recoup this money in any future trade. It is often difficult to earn money to make up for what you lost, simply because your total remaining balance is smaller than it was initially, which means you have to make more earnings (as a percentage) to make up for your lost balance.
For example, if you invest 5,000 euros and lose 1,000 euros, you will lose 20% of your balance, leaving you with a final balance of 4,000 euros. To get your balance back to €5000, you will need to take profit of €1,000. However, with a balance of $4,000 (after the previous loss), you should now earn 25% of your available capital, instead of 20%.
5. Start small trades: To help you manage your risk and preserve your capital, start trading small amounts of money, rather than risking a large portion of your account balance. For example, in the previous example, if you put your entire $5,000 balance into one trade, it would be easy to lose all of it.
By contrast, if you trade only 20 euros, the loss will not significantly affect your account balance. This will provide you with an opportunity to learn trading from your experience and plan your next trade more effectively. With this in mind, deciding the capital you are willing to risk at 5% of your account balance (or less) will put you in a better position to continue trading forex (and improve your technique) for the long term.
How to manage risk in forex trading for beginners
Before making your first trade, it is important to think about how to effectively manage risk in the forex trading market. As discussed earlier, CFD and stock trading give you the opportunity to trade using leverage, which means that you can use a relatively small deposit to access a large portion of the market (up to 500 times the value of your account balance). This doubles your potential earnings by the same amount. However, it also doubles your potential losses.
Once you have mastered the psychology of trading and money management, there are a number of trading techniques that you can apply to reduce risk:
1. Diversify your investment portfolio: We all know the saying, “Don’t put all your eggs in one basket,” but many new forex traders do when it comes to their trades. Just as it is not wise to put all your money in one trade, relying on one currency pair increases the level of risk, because if the pair moves in a different direction than you expect, you could lose everything. Instead, consider opening a number of small trades across different currency pairs.
You can even consider trading other CFD instruments, such as trading stocks, indices, commodities, energy sources, etc., as this will further diversify your investment portfolio.