How important is Forex Money Management?

Loss and gain is the two important differences for a trader's money management style. And often viewed as unpleasant and even as a burden and this aspect can be a crucial part in forex trading success in the long term.

In forex money management the consistency of monitoring is being implemented and forced to the trader's position and he is to accept the losses when necessary. Mostly this aspect of the trading is not taken consideration but it is very important.

Large losses and poor money management is the breaking factor for many cases. Everyone wants the $1 billion profit in a single day, but that is a market rarity. A good forex money management will give a trader much better odds of a large gain than a trader who has little or no money management.

A very good advice for beginner traders by Larry Hite, a successful day trader is to risk only 1% of their total equity on any trade. For at 1%, the loss is very minimal and it is much easier to recoup and rebound.

In an individual trade, 1% only makes very little difference and even if the trader is wrong 20 times, he or she will still maintain 80% in equity. This would require discipline to the traders which is often not applied.

Money is easy to lose, but not so easy to gain back. This attitude of the market is what wise traders must keep in mind in order to avoid big losses.

An example is if a trader invests $100,000 and then loses $50,000 which is a 50% loss. However, the percentage that the trader should make is actually 100% in order to get back to the original $100,000. And this would mean that there was a 50% drawdown, the percentage of the difference between the peak and trough of an investment.

Because of that factor that traders joining the Forex market for the first time should use their speculative capital (money set aside for trading purposes with a high probability of loss) only.

It is advisable to select an amount that can be considered as an acceptable loss, in deciding how much money to begin trading with.

Establishing a high reward to risk ratio is another effective Forex money management strategy.

When there is a potential to make 3 times more than is being risked, or a 3:1 reward/risk ratio, it is a good time to trade. This is a high reward to risk ratio.

Using this strategy, the chance of a profit is much greater than lower reward to risk ratios. And this also leaves much more cushion in the event of a loss.

Usually a good managed forex or money management can take a trader from gambling with his or her money, hoping for a gain, but probably encountering many losses, to successfully trading while maximizing gains and minimizing losses.

This may not be as exciting into other aspects of managed forex trading, but to traders who wanted higher gains, forex management is an absolute necessity.