Forex Order Equity Management Tips

To help you completely understand the Forex game, I've been blogging about some of the forex basics.  Before you can start surfing the forex, you need a thorough understanding of proper equity management principles.

Staying in the Game: Practicing Sound Equity Management

It is important before you begin trading to learn how to manage your equity.

A large part of sound equity management is managing your risk.

The most important way to manage your risk is to set a profit limit order and a protective stop loss order for each trade you place.  Your trading software will most likely not require you to set a protective stop loss order and a profit limit order each time you enter the market, but doing so is crucial to consistent successful trading.

For each market order you set you will need one stop order and one limit order.

That means that every entry will have two exits.

If you you enter a long position (you buy) and you set one exit point higher than the entry price (that is your for profit limit order where you will sell if the prices reach that point) and the other exit point you set lower than the entry price (that is your stop loss order where you will sell if the prices reach that point).

This way, you minimize losses if you were wrong about the trade, and safeguard gains if you were right.

If you enter a short position (you sell) and you set one exit point above the entry price (that is your stop loss order where you will buy if the price reaches that point) and the other exit point you set lower than the entry price (that is your for profit limit order where you will sell if prices get to that point).

By setting to exit points for every entry you will minimize losses if you were wrong about the trade and safeguard gains if you were right.

When you buy above the market or sell below the market your order is a stop order.

The reason is this: if you place an order to buy above the market that means that your market order is a sell.  Your order to buy above the market is a stop order, which you set to minimize your losses should the market not go down, as you bet it would.

Setting a buy order above the market (a protective stop loss order) means that in each trade you make you will know in advance how much money you could potentially lose – because you do not have to place a market order to buy if the trade is going badly; that order is automatically filled when the market reaches that higher prices, it stops you out there.

In my next blog post, I'm going to talk more about market orders. Keep reading and you'll soon understand the basic rules of the forex market enough to start trading like a super successful rock-star (we'll get it it, stay tuned )

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