The Importance Of Money Management When Forex Trading

If you have any experience of forex trading, you will probably have discovered very early on that it is very hard to make money, but very easy to lose money. Furthermore it is often really difficult to bank really big profits from a trade because the temptation is always there to take profits as soon as they present themselves, whilst it is always hard to cut losing trades early and therefore they can accumulate really quickly.

That's why money management is vitally important. If you don't apply sound money management principles, then the reality is that you are unlikely to become a profitable trader in the long run.

The best traders cut their losing trades early and let their winning trades run for as long as possible, and this is something that you should strive to do as well. There is no point having lots of winning trades of say 10 pips, when one losing trade could cost you 200 pips and wipe out all your previous gains.

Another important aspect of money management is knowing how much risk to take per trade. The worst thing you can do is vary your stake every time you trade depending on how confident you are because this will probably result in losses being made at some point.

It is better to develop a profitable system first of all, and then risk a certain percentage of your current capital on each trade. That way your account will grow nicely if you are successful as your stake will rise in accordance with your account balance.

Expert professionals often recommend that you should risk no more than around 3% on any one trade. If you risk more than this, say 10% for example, then you only need a few losing trades to make a big dent in your account. So 2-3% is just about ideal because it will still enable you to grow your account nicely in the long run due to the effects of compounding.

Anyway the point is that capital preservation is an important aspect of forex trading, because you need to stay in the game in order to generate long term returns. If you are risking too much per trade, or are using large stop losses whilst targeting smaller gains per trade, then I'm afraid you are unlikely to be successful in the long run and will probably end up losing most of your capital at some point.