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Forex Money Management

Learn to control risks in trade. Forex smart money management



 
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Forex Money Management. Trade safe building stable gains

Money management is a way Forex traders control their money flow: literally IN or OUT of own pockets... Yes, it's simply the knowledge and skills on managing own Forex account.

Why money management matters

Forex brokers will rarely teach traders good money management skills, though almost all brokers will offer some sort of education, therefore it's important to also learn on your own.

There are several rules of good money management:

1. Risk only small percentage of a total account

Why is it so important?
The main idea of the whole trading process is to survive!
Survival is the first task, after which comes making the money.

One should clearly understand that good traders are, first of all, skillful survivors. Those who also have deep pockets can additionally sustain larger losses and continue trading under unfavorable conditions, because they are financially able to. For an ordinary trader, the skills of surviving become a vital "must know" requirement to keep own Forex trading accounts "alive" and be able to make profits on top.

Let's take a look at the example that shows a difference between risking a small percentage of capital and risking a larger one. In the worst case scenario with ten losing trades in a row the trading account will suffer this much:

Trades Account balance Risking 2%
of total account per trade
1 Start — 5000 100
2 4900 98
3 4802 96
4 4706 94
5 4612 92
6 4520 90
7 4430 89
8 4341 87
9 4254 85
10 4169 — 17% of the account has been lost
Trades Account balance Risking 10%
of a total account per trade
1 Start — 5000 500
2 4500 450
3 4050 405
4 3645 364
5 3281 328
6 2953 295
7 2658 265
8 2392 239
9 2153 215
10 1938 — over 60% of the account has been lost

Apparently, there is a big difference between risking 2% and 10% of the account balance per trade. A trader who has made 10 trades risking only 2%, under the worst conditions would lose only 17% of his initial investment. The same trader who had been exposing 10% of the balance per trade would end up losing over 60% of his initial investment. As you can see, this simple decision — a money management approach — can have serious consequences if misjudged.


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