Proper Money Management in Forex Trading
By Casey Stubbs
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.
Pay attention here, this is the most important area of trading if you get this wrong you cannot be a trader. It won”t work, take my word for it. I know, so don”t even try to not follow proper money management. Why do people insist on doing things that don”t work, I don”t know. If you don”t follow these guidelines you are gambling, in gambling you lose unless you get lucky. Remember we are traders not gamblers.
Money management is protecting your account, it is that simple, protect your account. You protect your account by managing risk. Before you ever make a trade determine the maximum dollar risk and the total % that it is in you account. Let me say that again because that is the most important rule in trading. Before you ever make a trade determine the maximum dollar risk and the total % that it is in you account.
How much should you risk?
It can be anywhere from 2 to 5% I personally like 2% because I can still easily make my profit goal of 5% per week. Trading is not a get rich quick program. It is a slow process to take profit from the market over time and the traders that have patience are the ones that will be successful. However, 5% is still low enough that if you follow it you will not wipe out your account. Remember to adjust the risk and figure it out after every trade because after every trade your account balance changes.
Risk to reward ratio is important in a money management system. This means that when you make a trade have a set profit target that is greater than the risk. For example if you expect to make 50 pips in a trade set your stop at 25 pips. That is a 2 to one risk to reward ratio. This is also where risk to reward helps you if your win 3 times more than your losses than you can lose 50% of the time and still be profitable.
In conclusion, practice proper capital management in all your trading activities. If you can master your fund management you will be fine because even if you are not the best trader you will still be able to keep trading until you get to be the best trader. You will never wipe out your account.
About The Author
Casey Stubbs is a Forex Trader that publishes a web site focused on teaching Forex Trading. There is a daily trade setup blog. Interactive trading school articles and a forex tutorial. His web page is http://www.winnersedgetrading.com