Forex Money Management Principles

Introduction

Money management is one of the most important things to learn in order to be a successful forex trader. When I started forex trading, I read through books and trawled the web looking for ways to make a fortune. I Would come across articles on risk reward and account management. But I would basically overlook it all, as all I was looking for was a strategy that would make me right about the market so many times that I would not need all this money management stuff.

How naïve I was! Money management is way- way more important than being able to predict the forex market correctly. It doesn’t matter how good you are, without rules and management principles you are doomed! And because the forex market is very hard to predict (in fact we dont try and predict at all) money management is crutial.

Risk 2%

You may have seen this before, and it is probably the most common figure used on the net, that is to risk 2% of your account on each trade you place. This means if the trade loses, you will only be down a small amount and it wont be a huge deal. If you feel that you are better than this, and you are sure you are going to win, you may well decide to risk half your account. But it does not matter how good you think you are, the market will proceed regardless of the opinions you hold. If you lose, that is half your account gone, and you will now need to gain 100% to get it back again! Risking such a large sum is madness. Even 10% is too high, because sooner or later you will have a period of drawdown. This is where you lose several trades in a row. Therefore if you risk 10% on each trade and lose 5 or even 10 trades in a row(which is by now means impossible) you could cause substantial damage to your forex trading account.

Risking only 1 or 2 percent, allows you to survive periods of drawdown, so that there will be enough left to enable you to recover.

Risk Reward

Most of the successful traders I have seen have a strike rate of 40-70 percent. This is the percentage of trades they win. I would say most of these are around the 50% mark. Therefore in order for you to profit from the forex market, you will need to make your winners bigger than your losers. If you were risking $100 on each trade and were taking profits at $100 with a 50% success rate your account would go no where. The answer is to make you winners bigger than your losers. It took me a long time to realise how important this was to my overall success. Generally speaking traders will look for a profit on a trade that is at least 2 times what they risked, preferably more. It is not impossible to make money by taking profits at the same amount that you risked, so long as your strike rate is higher than 50%.

Conclusion

This is just a brief description of, money management, some people have very complicated money management systems, mine is pretty simple. The point I am trying to make is you must have a money management plan, if not you will not succeed, this is way more important than trying to find a great indicator, or trying to be extremely accurate with you trades. I blew out several small accounts finding out that money management is important. PLEASE PLEASE PLEASE! Save yourself the expense and the time and learn about this stuff before you trade, I beg of you!!

Safe trading.

John.@