People choose to be Forex traders because of its multiple benefits. They can become independent, enter into the business whenever they want, take the profits, and close the trades. However, there are certain myths that exist about this market. One of the most popular myths is that you can earn a lot of money from this market within a short period of rime. This is wrong because without adopting money management techniques, one may face a massive economic crash. Read on to find some tips for money management secrets of forex traders.
Money management Secrets of Forex Traders should follow
Adopting a few risk management strategies may save an investor from losing his capital in a deal. Here are some of the essential management techniques that are useful for every trader in Hong Kong.
Setting up a stop-loss order
Professionals always use a stop-loss order to minimize financial loss if the market moves against them. They estimate the size of this stop-loss limit on the basis of the Average True Range (ATR). You may be familiar with this term because ATR is used in several technical indicators. Experts also use various stop-loss limits to cope with the changing pattern of the market.
Nobody can predict the upcoming condition of a market. The price can either rise or fall, and a beginner needs to analyze the indicators to acquire more knowledge because indicators can effectively generate a better result. Since nobody can accurately predict the market, professionals recommend that newbies set a stop-loss limit. This limit will end the trade when the price exceeds a fixed value.
A position of 2%
Though stop-loss order varies among the investors and trades, the percentage of risks per trade remains there. Experts believe that every newbie should allow a risk of only 2% of the entire trade account’s balance because they can’t tolerate too many losses. As a result, they leave the market frustrated.
Analyze the risk to reward ratio and correlation
The risk to reward ratio of a trade indicates the possibility of losing or winning a specific amount of money in a trade. For example, if you find out that the risk to reward ratio is 1:2, it will indicate that if the market moves against the investor, he will lose $100, and if the market moves for him, he will win $200. Experts state that the ratio should be a minimum of 1:2, though 1:3 or 1:4 is better.
Another money management technique is the correlation between the markets. If the correlation is positive, it will indicate that the markets will move in a similar direction, while a negative correlation indicates that the markets will move in the opposite direction. Analyzing the correlation is important because when two different markets have a positive correlation, it indicates that if an investor enters this trade, he will increase his risks. People who buy bonds online, always focus on the risk to reward ratio. They prefer to trade with low risk where the potential reward factor is very high. Such an approach helps them to cover their losses.
Reduce the trading size
Trading size plays a crucial role in determining the profit that a trader may win from a potential market or the amount of loss that an investors may face from a market. Before entering into a trade, an investor should set the volume or lot size. Lot size indicates the amount of profit or loss a trader will receive per “pip” movement in the Forex market. Professionals always recommend reducing the lot size because it can be an effective money management technique. For example, if a trader chooses a lot size of “0.1”, it will indicate that he may face a $10 profit/loss per pip movement. If he chooses a lot size of “1”, it will indicate that he may face a $100 profit/loss per pip movement.
These are the most effective money management techniques and secrets of forex traders, that every trader can follow and abide by. These guidelines suggested by the professionals can improve the trading skills of investors.