The most important thing in forex trading is having a good portfolio.
An experienced trader knows they can have the best system or strategy, but it won’t be very profitable if their money management skills are not up to par.
But success with money management can only come when you know how to build an excellent forex portfolio.
The market is overrun by people looking for “the one” strategy that will work all of the time, with any currency pair always giving consistent results with no drawdowns ever.
These people are usually new traders because once somebody realises that this isn’t possible, they give up hope and walk away disappointed – along with all of their cash.
A successful day trader holds on to their winners and exits with small losses when their system tells them to.
They know that “best practises” are essential to maintain a steadily growing account balance.
Kenneth Grant, the director of Forex Training Group, says, “Money management is essential because it allows you to make profits on losing trades and cut your losses short on winning ones.”
This principle applies to every market, including forex, stocks, commodities and more.
It’s all about knowing how much risk you can afford to take and sticking with your strategy from the beginning until the end.
Here are some tips on how to build an excellent forex portfolio:
Determine a risk-reward ratio based upon each trade
A good starting point for this would be 3:1. If you risk $100, that means that your potential reward would be $300.
If you risk $20, that means that your potential reward is $60. That’s a big difference in potential profits.
Set stop-loss targets for every trade
It prevents having all of your trades hit simultaneously and dragging down your account balance.
A loss never feels like a loss until it happens, and by then, it might be too late to recover.
Use pending orders to enter and exit trades
These can provide a price target for entering and exiting trades, which helps protect you from unexpected spikes or gaps moving against you while still allowing the trend to move in your favour (assuming that they exist).
You can also set limit orders (entry only) which will show up in the order book and allow you to get into a trade at a specific price.
Never add to losing positions
If you already have an open position against you, don’t go placing another one with more money trying to recover it.
It could cause your new position to go wrong, and then all of your trades are affected because now they’re connected.
You can close out the first trade or if it’s still showing some profit, leave it alone until it either reaches breakeven or stops trading for some reason, like reaching its stop-loss target (which is what you should be doing).
Use trailing stops after entering trades
It means that if the price is moving in your favour, you keep raising your stop-loss target.
But if the trend changes and starts moving against you, you do not reduce your stop-loss target because it’s still “in profit”.
When the computer issues this order (it does all of them automatically), it removes your stop altogether.
You can also use mental stops, set at a certain price level that will trigger when certain conditions are met, like closing out of all trades or setting the alarm on your phone to go off.
Use market orders when entering trades
Sometimes, it’s hard to enter a trade with limited orders outside of high-impact news releases, so in these cases, have a market order ready for quick entry.
If you’re already long on the position, you use a buy market order to increase your position size. If you’re short, use a sell market order to close some of your position (but never more than 1/3 of it).