Money Management Tips For Forex Traders

There's no doubt that forex trading is a growing industry, but most traders find that it's not easy to become a profitable trader. A major problem encountered by the majority of novice traders is that they do not know how to successfully manage their money.

This can be critical because even if you employ a successful trading strategy, you may still end up losing money if you are playing with high stakes that you can't really afford. The worst thing you can do is to adopt a gambler's mindset and open a large position when you are full of confidence about a particular set-up that may occur.

Sure you may get lucky and enjoy some huge winnings, particularly if you use a lot of leverage when opening the position. However it only takes a couple of losing trades to make a serious dent in your trading capital, and if you don't employ any stop losses you could easily lose all of your money.

So the point is that it's important that you forget about the idea of getting rich quick through forex trading. This is nothing more than gambling and it's definitely not the most effective way of generating sustainable long-term wealth.

A more productive strategy is to try and build your trading pot slowly and steadily. As long as you are employing a tried and tested trading strategy, you should find that your account will grow nicely in the long run simply because the size of your positions will increase in accordance with your trading capital, providing you risk a certain percentage of your capital on each trading position.

For example if you are prepared to risk 5% of your trading capital on each set-up then you will be risking $500 per trade if you start off with $10,000. However if your account does well and goes up to $15,000, for instance, you will then be risking $750 per trade, so as a result your gains will go up as well whenever you experience some winning trades.

I don't personally believe that you should risk as much as 5% on each trade. I think 3% is a more cautious and suitable amount because it then becomes much easier to absorb a handful of losing trades without making too much of a dent in your capital. We all strive to achieve a 100% success rate, but this is simply an unrealistic target, so it's worth bearing in mind that you will have losing trades along the way so risking 3% of your capital is a sound strategy.

A very productive strategy is to let your winning trades run for as long as possible because this will automatically lower your required success ratio and it will also mean that your successful trades will be far in excess of your initial stake. For example if you are risking 3% of your money on each set-up, you may find that a trade that moves heavily in your favour could easily generate the equivalent of 6-10% of your overall bankroll.

So I think it's worth making the point that it's absolutely essential that you protect your trading capital and use a sensible staking plan when trading the forex markets. If you don't do this you will end up gambling your hard-earned money away.