Money Management in Forex

Money management in the Forex market, like any other financial market, deals with an investor’s risk quotient in the market. As the chances of success or failure in the forex market are equal (50:50), a good forex money management strategy should include the following:

• Monitor your trading positions regularly to measure the progress made.
• Keep a ratio of per trade risk to 5 percent or less of the capital designated for trading.
• Do not overtrade or take too many trading positions at one time. Ideally, a trader should restrict himself to three trades at a time.

Always follow the Drawdown Management approach: This approach involves making a larger percentage of profit to cover losses and making the capital amount reach the same level as it was before the losses. For example, an investor invests $5,000 and loses half the amount. To reach the same level of capital amount ($5,000), s/he has to make a 100% return.

A good money management strategy aims to achieve the following in the prescribed order:
Survival: This means preservation of capital put into the currency financial market. Beginners should aim for currency preservation with their trades.

Profits: Learning from trading mistakes and aiming to make normal profits should be the target of a trader who is neither a beginner nor an expert.

Exceptional Profits: A market player who learns from his/her mistakes and keeps investing regularly can aim to outplay the market and make exceptional profits.

Most beginners fail in the forex market because they aim the above mentioned three money management goals in the opposite order than what is prescribed.

Investors fail in forex money management because they trade “freestyle” without any strategy and because they do not predetermine their risk quotient with stop loss tools.

Stop Loss: To prevent being influenced by the opinions of others, volatile currency movements or the hope of earning from a currency pair, the stop loss function of the forex trading platform should be used. It helps to minimize/stop losses by putting a buy/sell order as a currency pair reaches a designated level. It implies a predetermined decision regarding the risk level for a currency investment. A good money management strategy always involves the use of stop loss, besides keeping a tab on your daily trading progress and monitoring the invested currency pair(s).

Increasing Your Winning Percentage: To win in the forex market, an investor’s trades should be based on methodologies and guidelines. A smart investor does not trade freestyle but follows a strategy involving patterns and technical indicators that s/he is well-versed in. You can use chart patterns, candlestick chart patterns and technical indicators to help achieve success in the forex market.

Increasing Your Win/Loss Ratio: An investor should aim to increase his/her return with each subsequent trade. Successful traders follow a risk-reward ratio equivalent to 1:2, signifying that they make profits equivalent to twice their losses.