Forex Money Management

Trading money requires strict money management rules: that’s what differentiates it from gambling and that’s also what separates good and seasoned traders from amateurs. In the long run, managing your money correctly is the only way to actually make money.The first thing you need to know about trading money is that although you will most surely win, you will also most probably lose. Losing money now and again is an integral part of trading forex. Accept it. Know that losing streaks can and will happen, even to the best traders. And while it’s difficult for anybody to accept such a fact, you should always keep this in mind when you trade. The main question you need to ask yourself is: how much are you willing to lose and risk? There are as many ways to answer this question as there are trading profiles. Let’s concentrate on the average profile of a new trader, since it is he who usually ends up learning the importance of money management the hard way.The first recommendation is to set your rules so that you will always have enough money on your account to stay afloat and start anew. Know that the more money you lose, the harder it is to get back to your original account size. For instance, if you lost 60% of what you had in your account to start off with, to make it back, you’d have to make 150% of what you currently have in your account… And that’s really hard. The general recommendation is to trade no more than 3% of your capital per transaction. Some day traders even recommend trading just 1% of your capital at a time. You should therefore set yourself a reasonable level of leverage and risk.The second recommendation is to keep your feet on the ground. Unfortunately, forex history is full of stories telling of how traders lost all their trading earnings to one big loss or a series of medium losses. These regrettable endings are usually the sad result of poor money management. Traders tend to focus too much on the legendary “big win” and forget about losses. You must know to cut losses. Finding the right stop loss is a crucial part of money management and it depends on the type of trader you are.Also, remember that trading with a good risk/reward ratio means more chances of profitability.