The key to success in online forex trading is not a statistical analysis strategy or a magic indicator. You will not find this key in fundamental analysis or by understanding major economics releases related to unemployment figures or to the consumer price index.
Most investors who enter the world of forex trading relinquish their portfolios after a handful of losing trades. This high rate of attrition is an uncomfortable reminder that many would-be forex traders enter the market without a solid money management strategy, which is the key to success.
Forex traders who take market positions without applying solid principles of money management are essentially their investments. Of all activities associated with forex trading, money management may seem like the least attractive, but it is the most crucial and should be practiced at all times.
Understanding the Key To Success in Online Forex Trading
The reason money management is the key to successful forex trading is that this is a market requires leverage. Forex trading is conducted through minimum lot sizes that are typically out of reach for most retail traders, which means that they must operate on margin.
It is important to remember that the forex market is the largest, most liquid and most dynamic in the world; its participants range from central banks to interbank players and from institutional investors to market makers. In order for day traders to be able to access this market on a retail basis, they must essentially borrow from their brokers.
Money management is a requirement in all financial activities that involve access to credit, and it is the key to success in forex trading.
The first step to understanding money management in forex trading is that this is a market where the potential for loss is substantial. Let’s say you take a buy position on EUR/USD and your retail broker sets you back a couple of pips for the right to trade on margin. You see the market turning against you and exit at a 25 percent loss. This may not be a big deal now, at least not until you realize that you will need to produce a 33 percent return on your next trade just to break even.
Imagine another EUR/USD trade going against you, this time setting you back 50 percent. If you do not double your money on your trade, your portfolio will stay in the red. Losses of 25 and 50 percent are pretty common among forex traders who do not follow a good money management strategy.
When it comes to money management in forex trading, various strategies can be applied for the purpose of achieving success. The most common strategy involves risk mitigation by means of stops, which are based on simple equity, chart volatility, or margin indicators. Beginners should start by learning the margin and equity stops. There may still be losses in the beginning, but they can be kept down to about two percent for comfort.
In the end, the key to success in forex trading can only be found within the realm of sensible money management, which all traders should practice.