If there is such a thing as the secret to long term success as a trader in the forex market, it’s money management. Money management is not some vague abstract forex term, it literally means managing your money wisely. This may seem very basic, but you would be surprised how hard it is to manage a forex account and to stick to your money management principles. Part of the joy of forex trading is that it’s exciting stuff – currencies going up and down all the time, fantastic leverage opportunities and multiple simultaneous trades make it all too easy to get carried away and quickly end up with a not so exciting zero in your account balance.
Having said that, money management is not a set list of rules. Every trader has to devise a money management system that will serve his trading style best. Conservative traders will have a conservative money management system, while risk takers will have a more flexible money management system to allow a margin for those risks. The purpose of this article is to allow you to build your own set of money management rules by getting to know some basic money management principles.
The most important principle of money management is that you should only invest a very small percentage of your total account balance in each position. The reason for this is very simple. Let’s assume that you have $1000 in your account and you invest $500 in one position. If your position is a losing one and you end up losing the entire investment amount, you will lose 50% of your account balance. The problem is that to make up for this loss you would now have to invest 100% of your remaining account balance and to bring in a 100% profit which is very hard to do. The lesson of this example is that it is much easier to make money when you have money, therefore if you risk a large percentage of your account balance you will make it that much harder for yourself to make up for the loss. Most money management experts will recommend investing 2% of your account balance in each position, but if your trading style is more adventurous you can go as high as 5%. Remember, the more you lose the harder it becomes to restore your original balance.
You may also want to set up different rules for first trade and follow up trade investment amounts. It’s not a bad idea to put a tighter limit on your first trade and then allowing yourself to make a bigger trade once your preliminary trade has confirmed that you’re trading on a strong trend that’s not likely to reverse any time soon. Keep in mind that with this type of strategy, even though you’ve made a first cautionary trade, there is no guarantee that the trend won’t reverse the second you open a bigger trade. The forex market is unpredictable so you can always count on a few unpleasant surprises. We would suggest monitoring your larger trades quite closely and always setting up Stop Loss and take Profit Orders to minimize your risks.
The second principle is diversifying your trades. By opening several small trades instead of one big one you are significantly minimizing your risk and increasing your chances of long term profit. Any investment specialist will tell you that investing all your investment capital in one instrument, even though it may seem a sure thing, is the financial market equivalent of a suicide. All traders have a favorite currency pair that they like to trade on more than others, but you should never be exclusive with your trading instrument selection. Better yet, if the platform you’re trading with also provides commodity trading, it’s a good idea to diversify your trades even further by buying commodities such as gold, silver and oil, along with you currency pairs of choice.

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