Forex Trading Style and Money Management

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Successful forex investors follow a proven trading style or methodology. It is crucial to understand that to reap the rewards on the table in forex you must define, practice and embed the trading style which best suits your own lifestyle and which brings you consistent profits.

But even more vital than trading style is the need for prudent money management. Some persons look at it this way-: in the currency markets or any other type of investment for that matter; although you need to make profits, you should “be more concerned with the return of your investment, than the return on your investment.” Indeed this might be seen as taking money management to the extreme, but really, if you do not manage your money, who else will? Let’s look further at these two topics of trading style and money management

         A. Trading Style

Trading style refers to how exactly you trade. The best trading style for you is the one that your emotions and your schedule are compatible with. Here are the main factors which determine which trading style you will employ:

  1. Emotions – Are you an erratic person with high energy who likes to get things done in a hurry? You’d probably enjoy scalping and or trading lower time frames such as the one minute. Are you more laid back and do you prefer things to flow in a slower paced manner? If so you’d probably prefer medium term trading, for example from the daily or weekly charts.
  1. Time – Do you have the time to actively monitor your charts for hours each day? Trading from the lower time frames would then be up your street. If you have a 9 to 5 job you may only be able to look at your charts at the end of each day and at the start of the trading week. Trading the daily, weekly and monthly charts may better fit in with your schedule
  1. Technical or Fundamental?

This really refers to how you analyze and hence determine how to place trades. Whether it is with heavy reliance on technical indicators or on the actions of news, world banks, governments and global activities.

  1. Market Swings

As a swing trader you trade market swings with the aim of catching a huge move

  1. Market Position

Here, pending orders are used and the trading position is held for days, weeks or months.

      B.Money Management

Before you even invest in trading the markets you should always make sure you are investing money you can afford to lose. This is so because currency trading is a high risk venture which can make you money very quickly, but the reverse is also true.

One wise way of remaining profitable in your trading is to never risk more than 2% of your account balance on any one trade. By doing this your account will have the room to breathe whenever you experience a series of drawdowns. If you shoot for at least a two to one reward to risk ratio per trade, it will be possible for your account to grow even if your loosing trades outnumber your winning ones.

Stop Loss

Successful traders recommend that a stop loss be used for all trades. This preserves your account should the market go against you. By taking you out of an unfavorable trade before your losses mount, a stop loss could turn out to be your lifeline.

Finally, having too many trades open at one time makes it more challenging to keep a tab on your trading capital. This is even more pronounced for large position sizes.

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Written by Ferl Ngningone

 


Ferl is a former Financial Analyst at BNP Paribas and a well-seasoned globe trotter. Besides trading online he enjoys traveling more than anything.