These are just a few of the important rules of money management that should be used every time you make a trade. As we all know, there are no guarantees in trading. But one thing is for sure; good money management levels the playing field and allows you to make consistent trades that are more likely to be successful.
1. Never trade without a stop-loss
A Stop-Loss is used to limit the amount of losses in trades. Setting a Stop-Loss will grant you some protection and limit your losses.
2. Always trade with a risk reward ratio of 1:2 or better on every trade.
You wouldn’t spend $100 on a stock with the intent to make $50. Ideally you’d want it the other way around, risk $50 to potentially make $100. The same can be said in the Forex.
3. Never over leverage on your account.
Leverage is a vital tool in financial trading but it can hurt you if used incorrectly. Keeping with good money management, stay away from leveraging more than 5% – 15% of your account value at a time.
4. Set realistic goals that can be reached within reason.
Setting realistic goals will help you stay motivated because you will be able to hit those goals and adjust them slightly each time. Realistic goals will also help you stay within your trading strategy and prevent erratic trading to meet unrealistic goals.