FOREX TRADING – The Importance of Money Management

by Michael on September 22, 2011

Forex – The importance of Money Management

Having money is always a good thing when it comes to Forex. You can use money to invest further and control your flow of income; it could also be a bad thing when you do not know what you are getting yourself into. With that said, you can make a lot of mistakes when dealing with your money flow. As far as Forex is concerned, Money Management is the control of money flow in and out of your digital wallet and the ability to manage it successfully.

Experienced traders will tell you that it is vitally important to have effective methods of money management in order to survive in the Forex. It enforces the idea that traders must constantly monitor their positions and take calculated risks, even if it means to take a necessary loss in profit. It is important to know not only when to trade, but to develop the experience to estimate how much to risk.

It is important to realize that experienced traders who are successful are survivors in the purest form; the ones that have more money often tend to sustain more profit losses and carry on when the odds are against them, because it is a calculated risk. They can equally know when the time is right in order to make back what they calculated as a loss, and then some high returns.

 It is equally important for new traders to learn how to survive in order to not only turn a profit, but continue to do so without burying themselves with risk.

Calculating Risks

When in a trade and the risk / reward ratio is not at least 1:2 (or ideally 1:3), then it would be unfavorable to continue down that path. Some traders dive into a pitfall where they take too big of a risk which ends up costing them much more than it was worth. An example of a bad trade would be losing 20 pips and winning 10, or losing 10 pips and winning 8.

A more favorable trade would be losing 20 pips but potentially gaining 50-60. Learning a solid foundation of risk calculations and money management will dramatically increase your chances to succeed in the long run.

How much to Spend on a Trade

Before diving into Forex, you must give yourself some guidelines to follow for every trade you enter in; to succeed as a Forex Trader, you must follow the rules of money management. You may wish to set limits to what percentage of risk you are willing to take on any given trade.

For example, if you have an account that has $5,000 in it, you would only want to risk a maximum of $100-150 (2%-3%) on a single trade transaction. Once you lose money, it becomes aggressively harder to regain what was lost.

Setting up these rules of money management for your trades are a good idea and can give you higher returns in your Forex trading career. If you wish to bend your own rules, ensure that you are comfortable in the environment and not trying to rush into things.

Any questions do not hesitate to ask me on here.

Have fun hunting those pips.

Michael.

 

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