Money Management in Forex Trading

Think about it, many forex traders spend most of their time trying to figure out when to trade. Proper money management is by far the most important factor in achieving success if for whatever reason you are set on becoming a forex trader. Many traders ignore the importance of proper money management. This is surprising given that money management is the only thing a forex trader can control. Instead of thinking when to trade, forex traders should be thinking how much to trade. There is no guaranteed way to make money.

Forex market is highly unpredictable and ruthless. Forex market is bigger than you, bigger than me and smarter than definitely all of us. Even the best and the brightest are wrong more often than they are right. We are bound to be wrong many times and make mistakes. Many people think that trading requires lot of risk taking. The biggest misconception many people have about traders is that they tend to take a lot of risk to make huge profits. You always control risk with proper money management techniques. This enables us to weather sustained drawdowns and live to trade another day.

All traders must know before hand how much they are willing to risk when trading a mechanical system or trading in a discretionary fashion. In reality great traders aim to minimize their risk relative to their returns at any given moment! Most of us exit the trade depending on our pain threshold level. All too often traders choose an arbitrary numbers that have little to do with proper money management. Ask yourself these questions before any trade: How do I determine my position size? How do I set my stops?

Loss is painful. It increases the level of stress for you. We all are afraid of losing. Our innate fear of failure makes us place too much importance on not to lose. Instead we should be giving more importance to learning how to manage our losses comfortably. Are there any good money management rules? Yes, good money management rules exist and the best way to see if your money management rules need tweaking is to look at your results. The good thing about money management is that it is easy to learn and implement. It just requires some discipline on your part.

For example, you should consider taking smaller positions to mitigate the risk of ruin if you consistently post large winners and losers. However, you consider taking slightly larger positions if your losers are substantially smaller than your winners! The longer you will stay in the market the higher the chances of hitting the home run trade. Longer term success in trading is achieved by accumulating steady profits and occasionally hitting the home run trade. With proper money management you can maintain the all important risk-reward ratio and hit home run trades more often.