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.

Forex Money Management

(by Milos Pesic)

Forex money management is one of the most important things you can learn before you actually begin making live trades.

The money management principles discussed here will teach you how to avoid the costly mistakes many new traders make, often to the degree that they lose their entire investment on the first handful of trades.

Psychology is really the most important factor to money management in forex. You have to be able to separate yourself from any emotional attachment you may have to your money. This is not very easy to do, but it works and it can be done.

If you allow yourself to become emotional on a trade, you will not exit the trade properly, and this could mean holding on to a trade when you should have let it go, or letting go before the trade had a chance to turn profitable.

First and foremost, you should consider leverage and risk. It is advisable that you never risk more than two percent of your account balance on any trade. However, some go further and allow for as much as ten percent, but never more than that. This gives you the ability to withstand market fluctuations, and if the trade goes bad, you still have money to try again. You should never operate under the assumption that you will profit from every trade. You should also plan for losses. Therefore, most traders will tell you that the best thing to do is to keep your gains large and your losses small. Develop your trading strategy around this idea.

Keep track of your gains and losses. Keeping accurate and detailed records of your account activity will allow you to see whether or not the strategy is working, or if it needs to be re-built.

Never go blindly into trading without a way to keep track of results. You will lose all of your funds and never understand why it happened.

Finally, it is highly advisable that you first practice a strategy on a demo account. Nearly all brokers offer a virtual account whereupon you make trades in real-time, but with imaginary money, so nothing is risked. This is the best way to test a strategy before you put your real money on the line.

However, be careful, once again, of the psychology of trading. When you play with fake money, nothing is risked. When real money is on the line, you must not get emotional. If you do, you will find yourself with very different results, most likely losses, than you had with the demo account.

Milos Pesic is an expert in the field of Forex Trading and runs a highly popular and comprehensive Forex Trading web site. For more articles and resources on Forex related topics, online forex trading, trading tips, forex software and much more visit his site at:

=>http://forex.need-to-know.net

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