Why is Money Management Important?

One of the most ignored aspects of forex trading by new forex traders is money management or risk management. New forex traders often rush into trading without proper education and are driven by profits which can be exceptional if forex trading is understood. There is plenty of false and misleading advertising which promises new forex traders great returns with small deposits. This often leads to a new forex traders making a small deposit and taking advantage of a big deposit bonus in order to trade large lot sizes chasing returns.

What is money management?

It means that you manage your forex trading portfolio properly and understand how much of your money you will put in each trade. It also refers to how much of a loss you are willing to accept on each trade. This is one of the most important parts of trading as it will prevent you from losing all your funds on one trade or a few trades.

For most new traders it is best to risk only 1% or 2% of their capital. Once a strategy delivers consistent results this could be increased to 3%, 4% or even 5%. A much bigger increase is not recommended for any forex trader as you would like to have the ability to open more than one trading position at the same time and take advantage of more than one opportunity.

Here is an example of how a 1% risk profile would affect your forex trading account:

1. You make a $500 deposit and take advantage of a first deposit bonus of 100%. Now you have a total of $1,000 to trade with and this is a solid start.


2. 1% risk means that you will not lose more than $10 per forex trade. 


3. A lot size of 0.50 lots means that each pip move in a standard forex trading account will equal $0.50.


4. Risking a total of $10 per trade this means you need to set your stop loss at 20 pips away from your entry price (take spread into consideration). 

Make sure you do not ignore money management as part of your trading so that you will be able to learn how to trade and become profitable over time.