Proper money management rules can be really helpful when trading FX, and if you, as a trader, haven’t developed yours yet, there is no time like the present. Although fiat currencies are still the most liquid assets and daily ranges are small, risks still exist and you will face them sooner or later.
In light of that, here are four useful money management tips that are still relevant in 2022. Keep in mind that the year has just started, and already multiple concerns regarding monetary policy normalization, global inflation, and the path of economic recovery are already in the air. Navigating in such an uncertain market environment is only possible when one is equipped with valuable knowledge and trading methods.
Tip #1: Trade uncorrelated currency pairs
Sadly, most traders today are not able to comprehend the importance of trading uncorrelated assets. They believe that by trading only on different currency pairs, they can achieve diversified exposure. However, in that case, if these assets move up or down in tandem, their exposure to risk is very similar.
Since USD and EUR-related pairs account for a large portion of daily trading activity, the task of searching for diversification options is not easy. You can, though, study some minors and exotic pairs. These assets carry higher volatility, while also not being correlated with popular pairs such as EURUSD or GBPUSD.
Tip #2: Stick to tight risk management rules
You should know by now that trading forex involves a lot of probability calculations. That means each trade carries uncertainty with it from the beginning till the end when you decide to close it. Unfortunately, even though losses can occur, traders continue to ignore risk management.
There will be occasions when you might be wrong with your calculations, and that’s when you can differentiate yourself from other, less experienced traders. Use stop-loss, risk a fixed percentage of your account on each trade, and try to keep your trading accuracy above 50%. The broker easyMarkets is an example of a forex provider offering risk management tools such as free guaranteed stop loss and negative balance protection. As a trader, these kinds of benefits can provide extra peace of mind and make a difference to your long-term results.
Tip #3: Look for weak vs. strong currencies
An imbalance in the order flow creates impulsive trends. In forex, you are buying one currency and selling another, which is why you have to look for weak vs. strong currencies carefully. Over the past year, the US dollar outperformed most of its peers. Also, because inflation is relatively low in Switzerland, the Swiss Franc is another currency favored by traders.
Conditions can change at any point, and your job is to anticipate what currencies are able to outperform. Keep in mind that in a fiat monetary policy, money does not have an intrinsic value, but rather a relative value. It’s not possible to see all currencies drop or rise. If some go down, others will necessarily go up.
Tip #4: Monitor trades frequency
Overtrading is another mistake traders often make. The number of trades per day, week, or month is not the same for everyone, and it depends mainly on one’s trading strategy and how much time they allot to the charts.
Opening many trades at once can weigh on your bottom line. On top of trading costs, the risk of making mistakes, especially if you are a beginner trader, naturally increases. ‘Less is more’ is a rule that becomes more relevant than ever here.