Understanding Money Management Trading Strategy

Importance of Money Management in Forex Trading 

Given the high risk that traders will face in the market, it is important for traders to have a proper fund management strategy. Money management is one of the important factors in forex trading related to risk control. There are many ways that traders can do in managing money, but the key is risk limitation.

Money management trading is the management of funds or models in a trading account. To be able to make profitable trades, traders must have a healthy margin account. Before making a trading transaction, it is highly recommended to calculate in advance how much volume or lot the trader will use for the transaction. It is recommended that traders use lots of no more than 10% of the capital. This will make margin traders healthier and safer to trade.

Amount of Risk Per Trade

The amount of risk per trade can be measured in monetary terms, not in pips, and is usually determined as a percentage of the capital or balance in the trader's trading account. For example, a trader has $10,000 in his trading account. Then the trader sets the maximum risk for each transaction at 5% per trade. This means, the maximum loss that a trader may suffer on each transaction is 5% x $10,000 = $500.

In other words, the risk for each trade that a trader makes should not exceed $500. If the trader's first transaction suffers a loss, then the remaining funds are $9,500. However, if the trader wants to make another transaction with a 5% risk limit per trade, then the maximum risk for the next transaction is 5% x $9,500 = $475, and so on.

The 5% risk limitation is based on the last capital owned. Therefore, it's a good idea for traders to stop trading, or evaluate if the trader suffers a loss of up to $5,000.

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