Money Management Basics for Forex Traders

Money management in the foreign exchange currency

market requires educating yourself in a variety of financial

areas. First, a definition of the foreign exchange currency

or forex market is called for. The forex market is simply the

exchange of the currency of one country for the currency of

another. The relative values of various currencies in the

world change on a regular basis. Factors such as the

stability of the economy of a country, the gross national

product, the gross domestic product, inflation, interest

rates, and such obvious factors as domestic security and

foreign relations come into play. For instance, if a country

has an unstable government, is expecting a military

takeover, or is about to become involved in a war, then the

country’s currency may go down in relative value compared

to the currency of other countries.

There are five major forex exchange markets

in the world,

New York, London, Frankfurt, Paris, Tokyo and Zurich.

Forex trading occurs around the clock in various markets,

Asian, European, and American. With different time zones,

when Asian trading stops, European trading opens, and

conversely when European trading stops, American trading

opens, and when American trading stops, then it is time for

Asian trading to begin again.

Most of the trading in the world occurs in the forex

markets; smaller markets for trade in individual countries.

Simply put forex trading is the simultaneous buying of one

currency and selling of another. Over $1.4 trillion dollars,

US of forex trading occurs daily and sometimes fortunes are

made or lost in this market. The billionaire George Soros

has made most of his money in forex trading. Successfully

managing your money in forex trading requires an

understanding of the bid/ask spread.

Simply put the bid ask spread is the difference between the

price at which something is offered for sale and the price

that it is actually purchased for. For instance, if the ask

price is 100 dollars, and the bid is 102 dollars then the

difference is two dollars, the spread. Many forex traders

trade on margin. Trading on margin is buying and selling

assets that are worth more than the money in your account.

Since currency exchange rates on any given day are usually

less than two percent, forex trading is done with a small

margin. To use an example, with a one percent margin a

trader can trade up to $250,000 even if he only has $5,000

in his account. This means the trade has leverage of 50 to

one. This amount of leverage allows a trader to make good

profits very quickly. Of course, with the chance of high

profits also comes high risk.

People who do forex trading do so because they are

attracted by 24 hour trading days, by strong liquidity –

unlike stocks, buying and selling is almost instantaneous –

and the fact that forex trading usually occurs without

paying commissions.

Like many other speculative investments, a key part of

money management for the forex trader is only using

money that can be put at risk. It is wise to set aside a

portion of your net worth and make that the only money

you use in forex trading. While the chances of good profits

are there, if you should have a problem and get wiped out,

you’ll only have a limited amount of money placed at risk.

Also remember that the market is n constant motion.

There are always trading opportunities. If a currency is

becoming stronger or weaker in relation to other currencies

there is always a chance for profit. For instance, if you

believe that the Euro is gong to become weak compared to

the US dollar then selling Euros is a good bet. If you

believe that the dollar is going to become weaker than the

yen, or the pound sterling, then selling dollars is wise.

Staying current on the news and current events in the

countries whose currency you hold is a smart move. Many

people reach points where they can predict currency

changes based on political or economic news in a given

country. Remember though that forex trading is

speculation, so be careful when managing your funds and

only invest what you can afford to risk.

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