Intro to Money Management
In the context of Forex trading, money management is a strategic technique that a trader can use to control risk effectively while aiming to maximize return on investment from trading. It is a key component of trading which a trader should pay attention to and which to a large extent will determine how successful a trader is. There is a large number of beginner traders that ignore the forex money management, and unfortunately, they ended up in circumstances that they incur losses that would have been easily averted.
To have a successful trading system, you need to take into consideration these important factors.
Price forecasting: it refers to which way the market is expected to trend. The forecasting is to determine if the trade will be considered as a bullish trade or a bearish. In other words, it deciphers if you will enter the market from the long side or the short side. In the event that your forecasting is incorrect, then you shouldn’t expect that anything else would work.
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Trading tactics or timing can determine the specific entry and exit points. Given the low margin and the high leverage offered, you should bear in mind that you do not have much room for error. Despite that your trade is correct regarding the direction of the market, it is quite possible to lose money from your trade if your timing is off. You should remember that timing is almost entirely technical in nature and as such, even if you are fundamentally oriented you should employ specific technical tools in order to determine specific entry and exit points.
Fund Allocation. The allocation includes areas such as portfolio makeup, diversification, how much money should you invest in a specific market, reward to risk ratios, what you should do following periods of success or adversity, whether to trade conservatively or aggressively.
In a recap, the price forecasting centers on taking sound investment decisions such as what to do (buy or sell), the timing aims to help you identify when to do it and then the fund allocation determines how much to commit to a trade.
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