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...
