Money management is the process of analyzing trades for risk and potential profits, determining how much risk, if any, is acceptable and managing a trade position (if taken) to control risk and maximize profitability.
Many traders pay lip service to money management while spending the bulk of their time and energy trying to find what they think is the perfect trading system or entry method. But traders ignore money management at their own peril.
There is no lack of forex money management strategies online, yet the fact is that a majority of neophyte traders lose a lot of money because they ignore this important aspect of trading. Money management is such a basic fact of business, yet many people do not pay attention to it.
The results of neglecting this facet of forex trading are disastrous. Without appropriate monetary strategies, it will only take a few forex trading sessions to lose your entire account. While you may have a large deposit, do not waste it by ignoring correct money management.
Get Rich Quick - it will NOT happen to you.
First the following must be kept in mind: no matter what you may read online, or what anyone tells you, the forex market is not the place where you can get rich in an instant. Theoretically speaking, it is possible to earn $1 million dollars from a $100 dollar account, but the chances of that happening is as good as winning the jackpot lottery twice. In other words, it can happen, but the possibility is quite remote.
Part of a superior forex money management strategy is limiting the amount you risk from your initial capital. Contrary to popular belief, one does not get rich quicker by trading in huge amounts. The ideal setup is to trade 1 to 2% of your capital in a single session. While the return may be small, it ensures that the losses will be minimal should the trade go south. You will also be surprised at how these small gains add up to a large amount.
As with any business venture, patience and perseverance are required in forex trading. The importance of maintaining a healthy initial capital cannot be over emphasized; the simple fact is that the more money you lose from your deposit, the harder it will be to make a profit as part of your earnings will go towards recuperating your losses.
Another way to keep your money in check is to establish Stop/Loss and Limit Orders. While these orders are easy enough to setup, it is more vital that you stick to it. If the pip count reaches the Stop/Loss level, then have the order executed; do not pull it back, hoping things will reverse course.
Finally, an integral part of forex money management is keeping abreast of the news. Stories of investors who make millions and billions in currency speculation did not discover a way to “beat the system”; it came from months, even years, of studying pertinent data.
Having said all that, there is no suggestion whatsoever that you should not take risks in the forex. No risk, no reward, it is said and true enough, you cannot possibly profit without taking a chance. But what we are saying is by following the steps above, you will avoid taking unnecessary risks.