Before you begin to trade on the Forex it is crucial that you make time to study the currency markets and that you start your Forex trading with a clear philosophy and a definite strategy. Then, once you start trading it is equally vital that you manage your trading funds with great care. As well as knowing which currencies to trade and having the ability to recognize entry and exit signals to trading, the successful foreign currency trader has to be able to manage his resources and to incorporate money management into any trading plan. There are numerous different strategies which can be applied when it comes to money management, but the majority of them will require you to keep a track of what is known as your core equity. Your core equity is the sum which you start trading with less the money which you have in any open positions. In other words, if you start trading with $15,000 and have $1,500 in open positions then your core equity is $13,500. As a general rule, when starting out you should try to limit your risk to no more than 1% to 3% of each trade. This means that if you are trading a standard Forex lot of $100,000 you should keep your risk to $1,000 to $3,000 and, for safety, should ideally start at just $1,000. You can achieve this by placing a stop loss order 100 pips (1 pip = $10) above or below the position at you enter a trade. Over time your core equity will rise or fall and you can then adjust the dollar amount of your risk. Looking at our example above, with a starting balance of $15,000 and one open position, your core equity is $13,500. If you then open a second position, your core equity will drop to $12,000 and you should limit your risk accordingly. On the same basis, as your core equity increasesrises, you can also raise your level of risk. Accordingly, if trading is going well and you have made a profit of $5,000 your core equity will rise to $20,000 and you could raise your risk to $2,000 per transaction. As an alternative, you might also decide to risk more of any profit made than you would be prepared to risk from your original opening capital. You might, for example, decide to risk up to 5% of any realized profits ($5,000 on a standard $100,000 lot) giving yourself a higher potential for profit. The secret to making money in Forex trading relies on a number of factors and one extremely important element of your trading strategy lies in your ability to tightly control and manage the money that you have available for trading.
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