Forex Money Management

Did you know that proper money management is more important than any other factor when trading? While this may seem like an overstatement, this crucial discipline can literally make or break your trading success. Even executing profitable trades takes a back seat to this element, as you can actually lose money even if you make a profit more than half of the time! How can this be? If you allow your losses to run, and cut your winners, you will see your funds dwindle over the long run. To help you avoid this unwanted situation, let's examine forex money management in more detail below.

When it comes to the topic of proper fund allocation, the best forex trading platforms may be able to help. Some programs allow you to see your available margin limits in real time, and even enable you to adjust it for each trade as you see fit. Therefore, you can add more leverage to likely winners, and use less when your trade has more potential for loss. How can you determine this information? If you have a system which gives you trading signals, it is vital that you keep track of your forex trading history.

Through extensive back-testing, it is possible to determine the maximum losses in a row which your system delivered during the last several years. This will give you a very good idea of when to double down, as the more losses you endure, the closer you are to a big win! Using this simple, yet effective approach, you can literally increase your profits by 100 percent or more.

Yet, wise forex money management involves more then just having the best trading platform and a good trade history. Experts recommend that you risk no more than 2% of your total portfolio on any one trade. While this may seem like a low number, some authorities have even stated that 1% should be your maximum risk on any given investment! Yet, this doesn't mean you can't use more of your funds, only that you must place a stop-loss at this level. For example, if you have an account of $10,000, a 2% stop would limit you to a loss of $200. However, you can invest $1,000 or even $2,000, as long as you set your stop at this $200 limit.

If you are still on the fence about whether you should use strict money management, some further information may help. While you may believe that the best forex trading platform and some quality indicators are all that you'll need, you would be mistaken! The simple truth is, it is always easier to maintain your funds, than to make profits which will offset your losses.

For example, if you were to lose 25% of your account value, it would take an increase of 33% just to break even. This negative gearing works against you the more that you lose, as a 50% loss takes a 100% gain to get back to square one! Yet, if you only risk 2% with each trade, you could be hit hard by the market five times in a row, and still only lose 10%. Also, if you pay attention to the number of losses you've had in a row, you will be able to increase your level of margin. This may allow you to easily make up your entire deficit on the sixth trade alone.

Another technique for preserving your funds, which will position you to better preserve your profits, is using stop-loss orders. There are several different types to select from, and the best forex platforms will offer every available form. The first is an equity stop, which is simple to grasp and easy to use. You choose the monetary amount you are willing to lose on each trade, and the order will automatically close your position if that figure is reached.

A second stop-loss order is based upon your trading system, and your indicators may produce a signal to get out of the market. For example, if you are running Bollinger bands, if the market crosses the lower one when you are in a long position, this may mean you should exit the trade. Finally, a volatility stop is a good tool to use, as it gives more room in a highly traded market and less when the action is slow.

Also, keep in mind that a stop-loss order is usually good until filled or canceled, so it gives you added protection if you aren't watching the market. It will automatically kick in, so whether you are away from your desk, experience software problems or are simply distracted your account will be safeguarded.

So, in conclusion, forex money management is an important discipline and it will determine your level of success in the market. If you take precautions and adhere to strict trading rules, you will survive the hard times and gain larger profits during good trading conditions! The best forex trading platforms offered today can assist you, by providing different types of stop-loss orders and also displaying your margin limits. When you use the above mentioned strategies, you will cut your losses and let your profits run, ensuring your account grows over the long term.