Fundamentals of Forex money management

Forex money management system intends to define the amount of money you can afford to lose while trading Forex. In other words, it can help you to save your money and protect your Forex deposit. During Forex trading, a trader has to think not only about the time of opening and closing positions, but also about the trading volume. A trader’s chances to save money can be improved due to a careful calculation of the maximum profit and maximum loss that he or she can afford. If you ignore basics of a money management trading, it turns Forex trading into a casino and gambling with respective consequences. To make your trading long-term and profitable one, you should create your own Forex money management system.

There is a number of generally accepted money management rules on the Forex market. According to one of them, the maximum loss received from one trade cannot exceed 5% from your deposit. This rule protects a trader's deposit from a shattering blow, which could be caused even by one trade if the market trades against you.

The second basic rule says that it is highly recommended to use a diversification principle. It means to avoid using trading instruments with a similar behavior at the same time. Due to this recommendation you can compensate the loss from one trade with the profit from another one. According to the typically movement of currency pairs, they are divided into the following groups: Dollar area, British sterling pound area, Yen area and Euro area.

Before you open a position, make sure that you follow these rules:

  • wait for not only the main signal for opening a trade, but at least one more confirming signal;
  • keep a trading journal, where you should write down the exact entrance price, signals that you use to open a position and conditions and prices that give signals to close a position.

Every trader has his or her own approach to the Forex money management. There is no universal method working for all traders. One we can say for sure: a money management system is a save boat for all who found themselves on waves of the self-willed Forex market.

 

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