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Money Management In Forex

Mar 24, 2008
Money management is the most important aspect when trading Forex.

Most traders only consider how much money they can win in Forex. They forget about how much they can lose.

They try to learn every single indicator to define a powerful system. Unfortunately, no matter how good a trading system is, it simply can't make you money unless you're using solid risk management rules.

So, in order to learn how to make money in Forex, the first is to learn how to reduce risks and use strong money management rules.

Consider the following: If you lose 10% of your account, you'll need to make 11.1% to reach breakeven. If you lose 30% you'll need to make 42.8% to reach breakeven. If you lose 50% of your account, you'll need to double your account in order to get to the starting point. And if you lose 90% of your account, you'll need to make 900% to recover all your losses.

Since Forex has such a high leverage, lots of traders lose their entire accounts in a matter of days. If you want to make money on Forex, you need to be a little smarter than this kind of traders.

Your first step to make money on Forex has to be to protect your money. This is what will allow you to stay in the game, while you keep growing as a trader.

To do this, you need to use solid risk management rules. As a rule of thumb, you should never ever risk more than 2% of your account on a single trade. This will allow you to face some difficult times without threatening your account.

Besides this, you should never ever invest more than 5% of your account on a single currency pair.

If you follow these simple rules, you'll be ahead most beginners on the market. You'll be trading like professionals do.

These rules are so easy that anyone can implement them. They are extremely important and they are the difference between a winner trader and a loser.

With this management rules in mind you can finally start building or using a good Forex trading system. If a system is not compatible with these simple rules, you know that's not a good system because it's much riskier, so it won't work consistently on the long run.

Even if you're using a system where you can use these risk management rules, if this system generates a trade where the risk (considering the pre-defined stop loss) is above the 2% or 5% of your account you should pass on this opportunity. There are a lot of opportunities on Forex, so it doesn't make sense to take too much risk.

The first goal for a trader is not to make money. It's to survive and trade on the next day. So, when you're trading Forex, remember that first of all, you need to protect your money. This has to be your number one goal. Your second goal is to make money. The third goal is to make money consistently and to improve your trading.

Most beginners lose money on Forex because they ignore the risk management rules. If you avoid this mistake you're on the right track to become a profitable trader in this market.
About the Author
John Baker is the editor at ForexTopTen. By visiting the website ForexTopTen you can read forex traders reviews about forex trading systems, trading courses, ebooks, softwares and brokers.
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