Money Management Concepts in Forex

June 29, 2013 5:50 pm

mone_management_forexEvery Forex trader has his own style and uses a set of strategies that work for him. However, if you want to be a successful trader for more time, you should combine these strategies with proper money management. A good money management system will keep your bank balance stable and will control the rate at which it grows or shrinks.

Many beginners underestimate the importance of proper bank management and this is often one of the reasons why they fail sooner than they expected. Combining a good money management system with a mediocre trading strategy will still result in less loss and more profit, so always try to improve your bank management methods.

Of course, you shouldn’t think that money management is something simple. In the beginning it isn’t so complicated, but as you get more and more experienced, you’ll see that controlling your money can be harder than it seems. The goal of money management is to tell you how much money you can spend on one trade without risking a major fraction of your bank.

If you put too much of your money on a single trade, then it is very likely that you’ll lose more than you can afford. In most cases, it is better to spend less money and work for a smaller profit, instead of risking your entire bank balance for just one trade.

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Money management is especially important for beginners, because it gives them the opportunity to make more trades, gain more experience, and learn more about the way this market operates. Basically, if you are a beginner, you should remember one thing – never risk money that you can’t afford losing. Don’t try to make a lot of money with one big trade. Instead, you should opt for several smaller trades that won’t cost you too much money, but will still bring you a nice profit.

If you are a beginner, then your first step should be to determine the maximum amount of money you can spend on one trade. In most cases, this shouldn’t be more than 5% of your bank balance. OF course, my recommendation is to stick to 2-3% in order to be able to make more trades. No matter what happens, you should never forget about your money management strategy, because this will usually cost you a lot of money. Even if you are absolutely sure about a trade, you still shouldn’t spend more money than your strategy suggests.

Another thing that you should keep in mind is that the demo account is the best thing for the Forex trader. Thanks to it, you can test your trading strategies and money management systems, and see how they work.

Keep in mind that demo accounts lack some of the problems of real money accounts – for example, you won’t face problems such as re-quotes, larger spreads or slippage. Keep these factors in mind when determining a strategy’s efficiency. My suggestion is to start by creating a low-risk money management systems, but at a later stage you’ll also need to think about a high-risk one.

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