This article looks at the foreign currency exchange management plans you should have.
Trading on the foreign currency exchange can be fun, but it can also be very stressful. The stress of trading is increased when you do not have correct management plans. There are a number of different management plans that you have to consider when you look at trading on the foreign currency exchange. When you trade on this market you will need to look at risk and money management. Both of these management plans are very important to the continued success of your trading.
The Importance of Risk Management on the Foreign Currency Exchange
The first management plan that you need to consider is the risk management plan. This plan helps you determine the risks you should be taking and the ways that you can limit the impact of these risks on your trading account balance. The first point in the risk management plan is to determine what your risk capacity is. Once you know this you will be able to look at the other aspects of your plan.
The risk capacity that you have will be a combination of your risk tolerance and the capital that you have. A high risk tolerance and a large amount of capital will bring a high risk capacity. This means that you will be able to use more risk than other traders.
Once you have the risk capacity you need to consider the risk per trade that you are going to take. Most traders will set this at 2% of their trading account. You can set this at more, but you need to consider the impact that will have on the trading that you are able to complete. If you have the risk level set at 5% and hit a streak of 10 losing trades then you going to lose 50% of your trading account instead of 20%.
In your risk management plan you also need to detail the different stop loss orders that you are going to use. There are a number of different orders that you can use with the most common being the hard stop and the trailing stop. You have to detail the way that you will use any stop loss order on the foreign currency exchange.
The Money Management Plan
The money management plan is something that traders know about, but few actually use. When you have a money management plan you will be able to lengthen the trading career that you have because you are able to keep track of all the transactions that you complete. One of the points in your money management plan should be the total amount you are willing to lose in a month.
Most traders will set this at 6% of their trading account balance at the start of the month. Some traders think that this is a very low amount, but you have to consider that in a day of trading you should have more winning trades than losing ones. If you reach the limit you have to have a routine in place to determine why you have lost this much and what you are going to do. You should actually stop trading live when you hit this limit.
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