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Forex money management is a very important aspect of Forex trading, all Forex traders will have losing trades at one time or another it is unavoidable. What makes it possible for successful Forex traders is a good money management plan to help them ride through the losses, the losses are simply put down as a business expense.
On average successful Forex traders have a system that has an 80% success rate, to break this down in simple terms, that means out of every 100 trades they will win 80 trades and lose 20 trades. The Forex money management plan must take into consideration the worst case scenario; losing 20 trades consecutively. A good Forex money management plan will work in conjunction with a traders’ success rate. If you trade with a 30 pip stop loss and trade at £1 a pip then you are risking £30 a trade. Now you need to take into consideration that you might lose 20 trades on the run that will mean you need a balance of £600 to whether the storm.
This system as a percentage means you should not risk more than 5% of your trading balance. You will find this figure mentioned in all Forex money management plans, in fact the general consensus is that you should not risk more than 2-5% of your balance. When just starting out in Forex it may be difficult to commit to this sort of trading balance but in the long run you will find it beneficial. As a beginner it is always testing your Forex money management plan alongside your Forex trading system to see if they work in conjunction together. You can always test your systems with a demo account before you go with real money.
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Source by Adam Woods