Forex Money Management

One of the most likely phrases that you will hear banded about when trading Forex is money management. Many professional traders will say that they have Forex money management strategies in place but this does not mean that they are giving it the full attention it deserves! Essentially, money management is important no matter what kind of trader you are because it is effective money management that can be the difference between your Forex career expanding or falling flat on its face.

The term Forex money management basically means the way in which traders manage the flow of money (both in and out) from their personal Forex accounts. To be a good trader you need to have the skills and knowledge to be able to maintain great money management. If you ignore the need for good money management for trading Forex, you will develop the habit of jumping into trades with no regards to the size of your account and how much you can afford to lose on a single trade. In fact, some people who are in the know about money management refer to this popular practice as gambling as opposed to actually trading Forex!

One of the first rules to follow when considering Forex money management is to decide which management style is right for you. There are essentially two main types of money management styles. You could choose to make many small stops and try to reap profits from a few larger winning trades; or you can take infrequent but larger stops whilst trading on smaller ones which mean that the overall profit from these smaller trades will outweigh any losses you may face. You will be able to determine which Forex money management style is right for you by trying both of them out. It will also depend on your personality and your trading techniques as to which style is best suited for you.

One important rule that you must follow no matter what money management style you take, is that you only risk a small percentage of your total Forex account. The percentage you risk is very important should you face losses when trading. There is a fundamental difference between losing 2% of your total account and 10% of your total account. As an example, say you started with an account balance of $5,000. If you risk only 2% of your total account and lose on 10 consecutive trades, you will lose approximately 17% of your funds. Should that figure increase to 10%, you will lose approximately 60% of the funds from your total account amount – scary figures huh?

The above example highlights the importance of thinking about trades before you enter them. Simply put, it is a lot harder than you may think to build your account back up once you have lost a high percentage of your account total. If you think about it, you will need to gain a lot of profit on your trades to “replace” the lost amount as well as then building up a profit after your opening balance has been restored. If the trade shows signs of a loss being more likely than a small win, do not enter the trade in the first place. This is bad Forex money management and it is important that you assume a “risk to reward” mentality when choosing which trades to enter.