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.
Money management is the most significant part of any trading system. Most of traders don't understand how important it is.
It's very important for you to understand the concept of money management and trading decisions. Money management represents the amount of money you are going to invest on one trade and the risk your going to accept for this trade.
There are many, many different money management strategies. Preserving your balance from high risk exposure is the main objective.
You must understand what the following term means. Core Equity
Core equity = Starting balance - Amount in open positions.
If you have a balance of $20,000 and you enter a trade with $2,000 then your core equity is $18,000. If you enter another $2,000 trade, your core equity will be $16,000.
When you trade without sound money management rules, you are in fact gambling with your investment. You are not looking at the long term possible on your investment. Rather you are only looking for that quick high return. Sound money management rules will not only protect your investment, but they will make you very profitable in your investing future.
People go to Las Vegas, Atlantic City or New Orleans to gamble hoping to win a big jackpot. We all know people who have won and won big. The question might be how are casinos still making money? In the long run, casinos are still profitable because they take in more money from the people that don't win.
Like attempting to lose weight and working out, money management is something that most traders say they practice Money Management but few truly practice. Money management is unpleasant because it forces traders to constantly monitor their positions and to take necessary losses. It is difficult for most people to do that constantly.
What is the Percentage Risk Method?
The percentage risk method aims to risk the same percentage of your cash float (not the same trade size) for each trade.
This method assumes that you are aware of:
1. The stop loss size of the trade
2. The percentage risk (of your unleveraged cash float), that you want to risk per trade.
The percentage risk method states that there will be a given percentage of your cash that is at risk per trade. Before you know what is at risk in a trade you need two bits of information: the stop loss size for that trade, and the percentage risk that you've chosen in your investment program.
Assume that you chose a percentage risk of 4% of your cash float. If your cash float is $10,000, this means that you want to risk 4% of $10,000 per trade, which is $400. So with every trade, the maximum you would be willing to lose would be $400.
With this chosen percentage, it would take you 25 losses in a row before you lose your entire float (25 x 4% = 100%). If your system is a good one, then 25 losses in a row would be highly unlikely.
On the other hand, if the risk chosen was 2%, then it would take 50 rather than 25 losing trades in a row to lose the entire float. The number of losing trades required to lose the float decreases as you increase the percentage risk.
Forex money management is a way of life for the prudent investor. Practice money management and you just might be one of 5 out of 100 that will be in a position to make money from Forex Trading.
Do further research and you might look into one of those amazing automatic Forex Trading Programs.