Money Management

Money Management

A very important part of trading and probably the first thing to think about when starting is Money Management.

The HIGH LEVEL OF RISK when trading the forex markets is what can be controlled when using money management.

The purpose of using money management of funds in forex trading is to make sure you don’t blow your account up, it’s a fact that while trading you will make some losses and you should plan for those losses that will happen from time to time, trading isn’t a 100% win game.

First make sure you have an understanding of the size of the trade you’re wanting to take.

Money Management

The chart above is a simple layout of trade sizes you may come across in you broker platform, some brokers for instance will let you trade at £1 a pip, this just the same as trading 10,000 Lot, and £10 a pip would just be the equivalent of trading a 100,000 Lot.

As with forex trading, a lot of brokers allow leverage when trading allowing you to place much bigger trades than that of the funds you have available.

As you can see from the chart above if you’re going to trade the 100,000 Lot / £10 a pip, meaning for every pip the price moves you will make £10 profit; if the price moves in the direction you want 100 pips at £10 a pip, congratulations, you’ve made £1,000

However should price move against you and into the opposite direction 100 pips, if you haven’t place a stop loss, you can now find yourself £1,000 down and/or getting a possible Margin Call from your broker, even if you had a stop loss on the trade at say 20 pips away you’d still be £200 down.

Depending on your account size, £200 can be a lot of money and a large proportion of you account balance if you only had £1,000 in the account.

A good money management strategy is to use the 2% rule, this means you never place more than 2% on any one trade.

Money Management

The chart above is a hypothetical example of using the 2% rule.

The account started off with £1,000 deposited, using 2% of that to trade with means a risk of £20.

As you make more profit and the account grows, the amount available to risk will increase, and vice versa, as you make losses the amount available to risk will decrease.

Money Management

The chart above is the same process however we used a starting balance of £10,000

As you can see, using money management helps you keep your account from blowing up all in one trade and it also helps with account growth.

*Please Note, Forex and other forms of trading carry a high level of risk to your capital as you could lose all of your investment. These products may not be suitable for every investor, therefore ensure you understand the risks and seek independent advice. Invest only what you can afford to lose. We are NOT financial advisers and we do NOT offer financial advice.