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Rules For Forex Money Management

Rules For Forex Money Management

Table of Contents

Money management is possibly the the most overlooked aspect of any Forex trading approach and yet the most important in determining success.

Otherwise profitable strategies often fail because of a lack of a successfully implemented money management strategy. Money management plays a very important role in profiting from Forex: take time to understand it!

What Does Forex Money Management Mean?

Money management in Forex is a set of predefined rules which you need to develop to fit in with your own trading style. The aim of a money management strategy is to maximize your profits and minimize your looses when things go wrong.

“Rule number one of investing is never lose money. Rule number two is to never forget rule number one” Warren Buffet There is no hard and fast rule to a money management strategy. We outline some guidelines below but ultimately any strategy should be based on the following criteria as a minimum:

  • The type of Forex trading you are intending to follow
  • The Trading Strategies employed (and the profit return from these)
  • The amount of trading capital you have available.
  • Your personal attitude to risk

Common Mistakes

There are several common mistakes that those new to Forex make. The most obvious is to place too high a percentage of their capital on a single trade. This can be for any number of reasons; inexperience, an impatience for profits or maybe overconfidence from an initial run of winning trades.

It is perhaps somewhat ironic that a good initial run can actually be the undoing of a trader because they are not forced to address the issue of money management until they hit a loss and by this time it is very often by, too late.

Losses too can lead to Money ms-management. Often there is a temptation is often to trade again too quickly after a loss in an attempt to repair both capital and pride. Invariably what happens is that losses are unnecessarily compounded leading to even greater risk being taken on the next and subsequent trades simply to get back to square one.

Dealing with a loss

Losing trades should be an expected part of every Forex Trading Strategy. Try as we might, we have never yet found a system that will never encounter a loss. However If you apply sensible money management to your Forex account, a loss or series of losses should be no more than a temporary setback to your Forex career.

What Is Good Money Management?

Let us start with the basics. The golden rule for any form of trading is to only trade with money that you can comfortably afford to lose… period! By this we mean, do not trade with money you need for to pay the mortgage, rent, utility bills, shopping bills etc.

Ok. So you have set aside your capital for trading and are ready to go. So how much of this capital should you risk on each trade?

Some long term studies into money management have shown that far from the perception of mavericks playing for ‘double or quits’ high payout wins, most successful traders were found to be quite risk averse. Many would restrict themselves to placing 1-2% of their available trading capital on an individual trade.

The reason they had been successful was due to their ability to compound small profits and ride out the inevitable difficult times. While Gains may come less quickly with such an approach but the flip side is that you will never be in danger of ending your career.

A simple way of implementing this is to start trading with only 1-5% of your available trading capital per trade. At the end of each month, reassess your trading capital on all closed positions and then proportion the same 1-5% per trade for the following month. What you will find is that as your account grows, so too does the amount you are staking in real terms, although the percentage stake of your available capital will always remain the same. If you repeat this on a monthly basis this will also help to exponentially increase your returns over time while at the same time managing risk in your account!

About Satish Oraon

I'm a good computer programmer & head of forex and crypto analyst, after finishing my programming like to trade & analyze forex, crypto and different trading assets.

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