Money Management

What is money management? It is managing risk in your trading. Most traders calculate potential profit before making a trade. Professional traders calculate risk before making a trade. Forex money management is one of the most key affairs you can read before you actually begin taking live trades.

It is part and parcel of any trading strategy. Besides knowing which currencies to trade and recognizing entry and exit signals, the successful trader has to manage his resources and integrate money management into his trading plan. Position size, margin, recent profits and losses, and contingency plans all need to be considered before entering the market.

Forex trading is not a guaranteed money maker 100% of the time, unlike what the ads seem to indicate. Experienced investors know this, and they know that some of their trades will lose money. The reason they're still successful is that they plan for these losses so that in the long term they remain profitable.

Money management is what full time and professional forex traders seen as one of the most important factor to succeed in forex trading. Below are the 3 proven techniques that forex trading experts always practice:

1. Only Risk Maximum Of 5% of capital Per Trade

Capital Preservations are very important, it can determine whether you are able to survive in the long run in the forex market. The reason for risking only maximum of 5% is that you still have ample capital to trade even if you loose a few trades. I risk only 1% of my capital per trade.

Never put all the eggs in one basket. Although you might have forex trading signals which gives you good probability trades, but this #1 rule should form a general part of your trading system, so that you don't risk too much on a trade.

2. Have a Healthy Risk to Reward Ratio

A lot of forex traders only care about making profits in the market. Some don't mind making small profits although their risk for that particular trade is higher. This is a huge mistake. Never risk more than what you can potentially make. For example, you should have a reward of at least 60 pips when you risk 30 pips, this is a healthy risk to reward ratio of 1:2.

This rule ensures you to be profitable, winning more than you loose. So let's say out of 5 trades, if you loose 3, which is total of 90 pips (30 pips lost per trade), you win the other 2 trades (60 pips per trade), you will still make 30 pips net(120 pips - 90 pips).

3. Do Not Open Multiple Positions Until First Trade Is In Profits

You may be confident that the first forex trade that you opened will be profitable, but do not open a second position until you see the profits from the first trade. This helps you to keep calm if the first position is in loss, and you don't have another burden from the second trade.

Those above may seem simple but actually require much discipline in real fact. That is what makes the difference between professional traders and retail traders, you need the right forex education. But give yourself a chance by getting forex tips, tutorials and trading system from my FREE ebook, to learn how to trade forex successfully like the professionals.

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wealth-in-reach said...

Great money management guidelines in Forex gives confidence to traders, the more they think less risks in a trade, the more the fear fades away.. great blog!

Trader Rich said...

Well said. One of my day trading rules is to preserve precious capital. No matter how confident traders are about their setups, they should always respect what the market is telling them now. Ignoring this simple rule is the root of lots of big blow.

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