Articles

MONEY MANAGEMENT RULES & GUIDELINES

Money management refers to a set of rules that aims to minimize your losses in the short term and maximize your profits in the long term.

■ Balancing your Decisions Between Reward, Time, and Risk

At any given time, the market offers a great number of risk/reward trade combinations.

• Asset A has the potential to move to Price X+5, but also the risk of going to Price X-5, in N days

• Asset B has the potential to move to Price X+12, but also the risk of going to Price X-10, in 2N days

• Asset C has the potential to move to Price X+32, but also the risk of going to Price X-20, in 4N days

When you select a trade, you must consider all these variables:

• Reward | Risk | Time

Carefully balance every trading decision between these three variables. Don’t underestimate risk and don’t underestimate time.

TRADING RULES

Trading is a zero-sum game, and as a few people are making a lot of money, there must be a lot of others who lose. That means that basically, you should trade against the crowd.

■ Your Trading Style must Match your Personality

Your character and personality play a major role in your decision-making process. Fear and greed can lead to weak hands and catastrophic decisions. Your trading style must match 100% your personality, in a way that our hands will always be strong no matter the market conditions.

• If you are a risk-averse person avoid trading intraday and don’t use capital leverage

• If you are a beginner, start by using a demo account to test your skills before trading for real money

PERFORMING MARKET ANALYSIS

Market analysis refers to the process of studying market fundamental data and measuring the dynamics of future demand and supply to identify risks and spot trading opportunities.

■ Think Long-Term and Invest in the Future

Invest in the future, not in the present. Focus on the big things coming in the future and ignore the small things happening today. As Larry Hite suggests you may not know what will happen tomorrow, however, you can have a very good idea of what will happen over the long run.

Your decision-making should be based on events that will take place in the next semester, not on events that take place today and are already discounted by the market.

Forming a Trade Plan

Most of us would have used vacations and planned outings at least one time in our lifetime. The thing that is essential to having a good memorable vacation is the master plan made before the start of the journey. The majority of us are also aware that planning is vital in most aspects of life; may it be personal or professional. Then why would Foreign exchange trading be any different? A successful forex investor would tell you that one of the reasons for his/her success is a forex trading plan. A good trading plan these days can make a difference between success and failure. Hence the significance of having a forex trading plan is at the top.

Setting Your Goals

A good forex trading plan will help you identify your goals. As a forex trader, it is crucial to understand the extent you are going to invest, and have an idea about what the output should be. One more point is when to invest and where to commit. They are the basic questions that get answered when setting a goal.

Now you have set your goals, next comes the preparation for the journey. You will have to analyze the markets, understand the analysis given, and keep track of the forex news and the forecasts made. This is the second step toward being a successful trader. As in any plan, preparation is vital. This is when the hard work and minute attention to detail come into play. The forex trading plan is as successful as the preparations and choices made before the real trading. The preparatory stage will give you the direction to consider and when to take the position.