What is money management

A critical tool in your forex trading success is money management. What is money management? It's a significant part of your trading system because it specifies your potential loss or profit at any given time.

Here it interviens the notions of risc reward ratio. This ration is nothing else but the rapport between the possible win and possible loss. Let's say you have a trading situation where your possible win is twice as big as you possible loss, you then have a risk reward of 2:1. If you learn to control you risk reward ratio you'll be one step closer to be a profitable forex trader.

In the left table we can see that if we have a 2:1 risk-reward ration, after having 5 winning trades and 5 losing trades we will still have a 5000$ increase in your forex account.

The bigger the risk percent/trade will be, the harder will be for us to get back to the initial account capital.

As you can see in the table from the right you can see that for a 5% loss of your account you'll have to win a 5.3% of your remain capital just to breakeven. If you'll lose 50% of your account you'll have to double your remaing capital(100% increase) just to breakeven.

The main purpose of money management is to keep the trader's capital as save as possible. Even if the trader will have a 10-15 losses in a row he must be able to continue trading with his remaining capital.That's why it's reccomended that you only risk a 1-2% of your capital on each trade.

A significant part of your trading system is money management. This concept is critical to your trading success because it specifies your potential loss or profit in a given time.

There are many money management strategies that you can use in forex trading. I'll briefly explain only some of them:

Trading fixed lot size/ amount of money

You can decide that for every 3.000$ in your account you can enter the market with one lot. Let's say you have a forex account of 3.000$.Using this money management system you will be opening positions of 1 lot. If you are fortunate and get to 6.000$ you will be trading 2 lots/every trade.

Trading with fixed percent for potential loss

This money management system allows you to risk a certain percent of your equity for any given trade.
Let's say that you want to risk only 1% of your capital. This means that your trade size will be calculated so that your potential loss will represent 1% of your equity.
Ex: For a 1000$ forex mini-account 1% means 10$. If you have a stop loss of 50pips for your current trade, you'll have to match that 1% (10$) with those 50pips. This means that those 50pips must have a value of 10$. 10$/50pips means that every pip must have a 0.2$ worth.