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Money Management is a very important factor of your forex trading method. I’m certain you would have come across about it various instances. So what exactly is Money Management? Lets Take a look!

Some say that it just is the percentage of your account that you risk per trade. Though, It is not a complete definition and I consider that it is much more than just a percentage figure. The trading system you use will have its specific Money Management rules. These rules dictate the number of pips you risk per trade (stop-loss for each trade), the target pips per trade and the portion of funds of your account that you could use each trade. You can check out some valuable forex trading systems at http://learn-fx.com

For eg, according to your system, the stop loss per trade is 30 pips, and target is 60 pips. Here, the risk/reward ratio is highly favourable where you risk 30 pips for a gain of 60 pips. Hence, even if you profit from just 2 trades out of 4, which is a 50% accuracy, it still results in gaining (60×2)-(30×2)=60 pips in profit. Similarly, if the stop loss is 100 pips for a target of only 15 pips, the risk/reward ratio is highly poor. Just a losing trade will equalise over 6 winning trades. Here, the system must have an accuracy of above 90%, to be able to profit from it, and it is practically very impossible.

So, risk/reward ratio is an important factor, and your money management laws should give you with a sound risk/reward ratio. You must in all cases follow your Money Management rules, and in no case risk in excess of 3% of your total funds on a single trade. Even world’s best trading systems do have losing streaks, and if you get one, your portfolio will be able to survive it and bounce back with ease, if you follow the Money Management laws with patience.

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