What Is Forex Trading Money Management
Forex trading money management is how you protect your capital so that you don't run out of bullets when you're in the trenches of the Forex markets, so to speak. The level of profits you make is directly proportional to how much capital you have at your disposal, so it makes sense for you to make keeping your capital safe a priority over making big profits. Before we get into the practice of money management in Forex, it's vital for you to understand that Forex trading money management is first and foremost an attitude. Thaat means that when you're making decisions, you always ask yourself: is this going to protect or jeopardize my trading capital?
Maximizing Your Returns With Money Management in Forex
The attitude of protecting your capital will carry forward in your practice of Forex trading money management particularly in the size of the risk that you take with each trade. The standard rule of thumb that is often quoted in popular literature is never to risk more than 2% of your capital, but in many cases, that can be too conservative. It really depends on the risk profile of your system, which is beyond the scope of this article. In actual fact, you can go up to 3% or even 4% to really maximize your returns, and if your risk to reward ratio is 1:1 or better, then it makes sense to gear it up to that level. Any higher though, and your risk of ruin is greatly increased.
Money management in Forex is a vital part of any profitable Forex operation, because if you risk any more than 4% on any system, there's a very real risk that your account will suffer a loss that it cannot recover from. For example, if you lose 20% of your account, it will require a gain of 25% to make it back. If you lose 50% of your account, it will require a return of 100% to make it back. Clearly, the more you lose, the harder it is for you to get back to breakeven. Money management in Forex keeps your account growing at the optimal level, so that you have maximized profits with minimized risk. However, even the best money management in Forex cannot help you succeed if you don't have a profitable Forex trading system. So be sure that you have both these vital components in place if you want to make consistent profits in Forex in the long run.
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