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How to Manage Your Forex Trading Money For Maximum Profit

Apr 2, 2008
Before you begin to Forex trading, you need to learn the basics of money management first. One of the things you need to do is to decide how much money you can afford to lose on a single trade, but just as importantly, you need to have a system set up that you decide you're going to follow when you do your trades.

One of the biggest mistakes beginning traders make is that they decide they're going to try to gamble and try to win the jackpot, but that's not the way to make true money in Forex trading. Most important is that you make consistently profitable trades with an occasional loss.

It's true that some people do make money if they "gamble" in Forex trading, but most people don't. If you truly want to be a successful Forex trader with a consistent profit set up, you'll need to have a system in place that will make you consistent and regular profits, rather than exceptionally large ones on occasion. This way, you don't have to simply depend on luck; you can actually depend on your own experience and a set protocol to help ensure profitability.

Just as with anything else, it's easier to lose money with Forex trading than it is to make it. For example, you can certainly gamble 50% of what you have set aside on a single trade; it's also true that you can lose that money. What happens, then, if you lose the other 50% on a next trade? When you gamble, you might often talk about a "winning streak" or "losing streak," but you don't want this as a Forex trader. You want to have consistent wins you garner yourself through a system you've set up, along with an occasional loss.

So instead of thinking like a gambler, think like the casino owner. Make sure that you win more often than you lose. How can you do this?

Trade with just a small percentage of what you have set aside for Forex trading. Let's say that you have starting capital of $10,000. You are going to come out much further ahead over the long run if you only risk 5% of that capital on every trade instead of 10%. Therefore, go for the smaller percentage per trade and simply make more trades. This means that even if you only come out ahead on 70% of your Forex trades, you'll not only still make an overall profit, but your losses will be much more comfortable and will be much more readily absorbed. This also helps offset the fact that you may very well have 10 losing trades in a row before you have another winning one.

Take a look at the chart below to see how utilizing 5% of your bankroll instead of 10% of your bankroll per trade will affect you:

10 Percent of Bankroll:

Bank - Trade
$10,000 - $1,000
$9,000 - $900
$8,100 - $810
$7,290 - $729
$6,561 - $656
$5,905 - $591
$5,314 - $531
$4,783 - $478
$4,305 - $430
$3,874 - $387

5 Percent of Bankroll:

Bank - Trade
$10,000 - $500
$9,500 - $475
$9,025 - $451
$8,574 - $429
$8,145 - $407
$7,738 - $387
$7,351 - $368
$6,983 - $349
$6,634 - $332
$6,302 - $315

After 10 losing trades with 10% of your bankroll, you'll have $3487 left in your account. However, with 5% risked per trade, you'll have $5,987. This gives you a much greater cushion after each trade to bounce back. Assuming a 70% profitable trade versus 30% losing trade ratio, this means that you should expect to get 10 consecutive losing trades every 1024 trades.

If you risk no more than 5% of your bankroll at any one time, you should be able to ride out even significant losing streaks. In addition, if you choose, you can choose to trade with larger margins once your account amounts increase. This will help you post even greater profits (along with proportionately larger losses as well, of course, although overall your profits may significantly increase).

One note to make trades easier for you is that if 5% of your current bankroll happens to be an odd number, round down to the nearest convenient number, such as $600 instead of $613. This makes the math easier to keep track of.
About the Author
Ian Armstrong is an avid Forex enthusiast.

He strongly recommends the free beginner's guide to forex trading, available directly from Forex Trading Systems
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