What is Money Management: describes strategies or methods a player uses to avoid losing their bankroll.
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.
The Forex, or foreign currency exchange, is all about money.
Money from all over the world is bought, sold and traded. On the Forex,
anyone can buy and sell currency and with possibly come out ahead in the
end. When dealing with the foreign currency exchange, it is possible to
buy the currency of one country, sell it and make a profit. For
example, a broker might buy a Japanese yen when the yen to dollar ratio
increases, then sell the yens and buy back American dollars for a
profit.
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.
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.
Please always make sure you check with the pros when dealing in
this market unless you are doing this as a hobby and don't have a lot at
stake in it. There are a lot of big boys playing here and they won't
lose much sleep if you and thousands others lose their shirts...
by David Mclauchlan
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