Money management in Forex

06.08.2015 Learn Forex Trading No Comments

The Money Management helps the trader to pass thought the series of losing trades and not to get into deep loss which will never be earned back.

Forex Money Management

This is in fact a set of rules that a trader must have constantly in his mind and never break them. If it is decided that 1% of the trading account may be risked in one trade at maximum, then this must be alpha and omega of the trading itself. When trading without any Money Management at all, the trading account is slowly or quickly getting into trouble soon equalling its amount to zero.

In order to explain this clearly, see an example of ten losing trades in a row considering that the original account size is 10.000 USD risking 1% per trade.

Trade no. 1% risk Account size
1 100 10 000
2 99 9.900
3 98 9.801
4 97 9.703
5 96 9.606
6 95 9.510
7 94 9.415
8 93 9.321
9 92 9.228
10 91 9.136

This example shows that even after 10 losing trades, the account balance is still

9.136 USD so is not unreal to get 9% of the trading account back.

Another table shows what would happen if we risked 10% per trade.

Trade no. 1% risk Account size
1 1.000 10.000
2 900 8.100
3 810 7.290
4 729 6.561
5 656 5.905
6 590 5.315
7 478 4.306
8 430 3.876
9 388 3.488
10 349 3.139

This example shows that after ten loosing trades the account balance is only 3.139 USD. Here a trader would have to earn more than 300 % in order to get back to the original account size.

Of course, each trader tries to earn as much as possible so the rate between the loss and the risk must be adjusted. In other words, increase the possible profit and reduce the risk to the minimum. This rate is called Risk Reward Ratio (RRR). Most of the successful traders have their ratio between the profitable and loosing trades 3:1. That means that the trade target is three times higher than stoploss. For simplicity, if a trader earns 300 USD on one trade, then he only risks 100 USD on his stoploss.

It is now clear that Money Management is the key element of successful trading, it should not be ignored in any case. If you keep the rules of Money Management, your trading will be much more successful.

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Forex trading is connected with a high level of risk, read our Risk definition

Risk definition

Forex trading is connected with a high level of risk and may not be appropriate for all the investors. The high degree of leverage can be and advantage or disadvantage. Before you decide to trade any such leveraged accounts it would be reasonable to carefully consider your investment objectives, level of experience, and risk you can afford. It is possible that you could sustain a loss of some or all of your initial investment that is why you should not invest more money than you can afford to lose. You should learn all the risks connected with the market trading and advise with an independent financial advisor in case you are not sure what you are doing..

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