Forex money management should be every trader’s first concern. Strict money management and risk control are essential to achieving long-term success in the forex market. The high level of leverage available to forex traders makes it important to manage risk exposure and to avoid over-leveraged positions. Successful forex money management aims foremost at the preservation of initial trading capital. Money management is the most significant part of any trading system.
Money management represents the amount of money you are going to invest in one trade and the risk you are going to accept this trade. Money management is critical because it shows the difference between winners and losers. It has been proven that if 100 traders start their trading program using a system with 60% winning odds, only 5 of those traders will be in profit at the end of the year. Think about that for a moment. Even though you start with 60% winning odds 95% of traders will lose because of their Poor Money Management.
Good money management is the realization that using a small percentage of your capital is a smart place to start. If you don't manage your capital it is tantamount to going to the casino! The number one reason why individual retail traders fail is through a lack of understanding or application of money management principles. Most traders utilize leverage without any knowledge of how this wipes out trading accounts time and time again due to normal market volatility.
Inexperience is possibly the main reason for traders losing money in forex trading. While traders tend to spend a lot of time searching or improving their trading strategies, not much of thought is given to the money management aspect of trading. Neglecting your money management principles as well as emotional trading increases risk and decreases your reward. As forex is extremely volatile at the best of times, therein lies an inherent risk, and having correct money management skills are essential when entering the markets.
If you have fully mastered your trading edge and developed it into a comprehensive trading plan, you have no reason to trade when your edge is not present unless you deviate from your plan. To preserve your trading capital and get the most 'mileage' out of it, the best thing you can do is to simply not trade when your edge isn't present. This seems like an obvious thing to say, but many, if not most traders, end up trading when they know their edge is not present. When you do this you voluntarily take frivolous risks with your hard-earned money, and obviously, this is something you don't want to do.
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