Before you begin to trade on the foreign currency market it is vital that you take the time to learn the ins and outs of markets and that you begin your Forex trading with a very clear philosophy and a defined strategy. Then, once you begin trading it is equally vital that you manage the funds available for trading with great care.



As well as knowing which currencies you should trade and being able to recognize entry and exit signals to trading, the successful foreign currency trader has to be able to manage his resources and to incorporate sound money management into any trading plan.

There are numerous different strategies that can be applied to money management, but the majority of them will be based upon keeping a track of your core equity. Your core equity is defined as the sum that you begin trading with less the money that you have in any open positions. So, if you begin trading with $15,000 and have $1,500 in open positions then your core equity is $13,500.

In general, when starting out you should try to limit your risk to no more than 1% to 3% of each trade. Thus if you are trading a standard Forex lot of $100,000 you should keep your risk to $1,000 to $3,000 and, to be safe, should probably start at just $1,000. This can be achieved by placing a stop loss order 100 pips (1 pip = $10) above or below your entry position for a trade.

Over time your core equity will rise or fall and you can merely adjust the dollar amount of your risk. Taking our example above, with an opening balance of $15,000 and one position open, your core equity is $13,500. If you then add 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 increase your level of risk. Consquently, if trading is going in your favor and you make a profit of $5,000 your core equity is now $20,000 and you could raise your risk to $2,000 per transaction. As an alternative, you could also decide that you are going to risk more from any profit made than you are prepared to put at risk from your original starting capital. You could, as an example, decide to risk up to 5% of any realized profits ($5,000 on a $100,000 lot) to give yourself a better potential for profit.

The secret to succeeding in foreign currency trading relies on a number of different factors and one extremely important part of your trading strategy lies in your ability to control and manage the money that is available for trading.