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Learn Forex Trading > Day 12 Class  ( Money Management ) > Money Management
Money Management
Forex Money Management. Trade safe building stable gains

Money management is a way traders control their money flow: in or out of pockets... Yes, it's simply the knowledge and skills on managing a personal Forex account.

There are several rules of good money management:

1. Risk only small percentage of total account

Why is it so important?

The main idea of the whole trading process is to survive!

Survival first, and only then making money on top.

One should clearly understand, that Big traders first of all are skillful survivors. In addition, they usually have deep pockets, which means that under unfavorable conditions they are financially able to sustain big losses and continue trading. For the ordinary traders, the majority of us, the skills of surviving become a vital "must know" platform to keep trading accounts alive and, of course, to make good stable profits.

Let's take a look at the example that shows a difference between risking a small percentage of capital and risking a bigger one. In the worst case scenario of ten losing trades in a row the balance of trader's account will suffer this much:

Trades Account balance Risking 2%
of total account per trade
1 Start — 5000 100
2 4900 98
3 4802 96
4 4706 94
5 4612 92
6 4520 90
7 4430 89
8 4341 87
9 4254 85
10 4169 — 17% of the account has been lost
Trades Account balance Risking 10%
of total account per trade
1 Start — 5000 500
2 4500 450
3 4050 405
4 3645 364
5 3281 328
6 2953 295
7 2658 265
8 2392 239
9 2153 215
10 1938 — over 60% of the account has been lost

Apparently, there is a big difference between risking 2% and 10% of the total account per trade. A trader who has made 10 trades risking only 2% of balance per trade, under the worst conditions would lose only 17% of the total account. The same trader who had been exposing 10% of balance per trade would end up with loss of over 60% of the total account balance. A simple money management rule significant results.

Money Management Styles

Generally speaking, there are two ways to practice successful money management. A trader can take many frequent small stops and try to harvest profits from the few large winning trades, or a trader can choose to go for many small squirrel-like gains and take infrequent but large stops in the hope the many small profits will outweigh the few large losses. The first method generates many minor instances of psychological pain, but it produces a few major moments of ecstasy. On the other hand, the second strategy offers many minor instances of joy, but at the expense of experiencing a few very nasty psychological hits. With this wide-stop approach, it is not unusual to lose a week or even a month's worth of profits in one or two trades. (For further reading, see Introduction Types of Orders.)

To a large extent, the method you choose depends on your personality; it is part of the process of discovery for each trader. One of the great benefits of the FX market is that it can accommodate both styles equally, without any additional cost to the retail trader. Since FX is a spread-based market, the cost of each transaction is the same, regardless of the size of any given trader's position.

For example, in EUR/USD, most traders would encounter a 3 pip spread equal to the cost of 3/100th of 1% of the underlying position. This cost will be uniform, in percentage terms, whether the trader wants to deal in 100-unit lots or one million-unit lots of the currency. For example, if the trader wanted to use 10,000-unit lots, the spread would amount to $3, but for the same trade using only 100-unit lots, the spread would be a mere $0.03. Contrast that with the stock market where, for example, a commission on 100 shares or 1,000 shares of a $20 stock may be fixed at $40, making the effective cost of transaction 2% in the case of 100 shares, but only 0.2% in the case of 1,000 shares. This type of variability makes it very hard for smaller traders in the equity market to scale into positions, as commissions heavily skew costs against them. However, FX traders have the benefit of uniform pricing and can practice any style of money management they choose without concern about variable transaction costs.


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