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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