One of the most important elements of the long-term success in the forex is skillful management of capital and prudent investments – while maintaining an appropriate level of risk. Both of these elements go hand in hand, because in order to understand and skillfully use the strategies you need to bear a particular risk to be able to properly manage your money.
Among the many factors, money management comes primarily to how much money you are able to risk when opening a specific position. Usually determining the level of risk is dependent on the amount of money being held in the account. Effective management of the investment money also means that you do not trade money that you can’t afford to lose. If you invest with a capital that you can’t lose, you won’t be able to avoid emotional decisions, and this is the first step to empty your brokerage account.
Money management also means having a plan about usage of the proceeds from your previous investments. Do you withdraw profits from the broker’s account and deposit it into a savings account, deposit them for different safe and long-term investment? Do you leave the profits on your brokerage account and invest further, trading larger amounts of currency as the funds in your account grow? The answers to these questions are very subjective and virtually every trader has a different idea about usage of the profits. The most important thing to have your own plan for managing your money right away. Don’t start thinking about it when it becomes hot, as we earn first earn money, because that’s the time you can make a very irrational decisions.
To succeed in the forex you absolutely need a good understanding of the concept of taking risks and expected return for a given investment. Looking at the market from the perspective of risk and profitability of each investment you have to think in the category probabilities. For example: You can look for a signal to enter the market and think to yourself, “Entering at this point is burdened with so-and-so level of risk, and if the investment goes as expected, I can earn that much.” If the profit is greater than the risk by a factor of at least 1.5 – the signal is worth further examining and entering the market. Any investment with a lower risk-return ratio is not worth of your attention.
Introduction to your investment of risk and profitability of each investment is a way to increase correct investments and reducing failures. If the ratio of profit to risk in your successful investments is 3 or 4, then even if you lose on most of their investments, you’re still coming out ahead profit-wise. This is how professional traders make money in the forex market and you can do it yourself in the same way. Application of the principle of risk and profitability is working, but only if it is used with fail-proof input signals. If you start investing too much or invest without careful analysis of the market, you will quickly get rid of the money from your forex account.