Money Management in Forex

There are a lot of money management methods that exist in Forex. From the silliest ones, for example “increase lot until we lean back” to “Binomial distribution based theory” (3 high formulas).

I am using a very simple and effective method, which I want to talk about in this review.

However, before describing the method I use, I want to say that you should not strain your the brain on this topic. Why not? First of all, a great deal has been written about money management. There are many books and articles on the subject containing hundreds of pages filled with formulae, numbers, etc. It is not necessary to read all of them, and it might even be harmful because they were not written by people expert Forex traders, but by scientists, and analysts who, for example, support a particular opinion, that are not always based on practical experience of trading in a Forex market.. It is better to do things simply, not in a complicated way.

The most important key is to follow money management in your trading.

That is why I suggest choosing the simple money management method, which I am using myself, and which gives a good result. At the end of this post, I also suggest an indicator that will count a necessary lot size based on this method.

The essence of the method is limiting risks in each transaction in the certain percentage, that is, I am recommending that you risk no more than 1-3 % out of an available deposit in each trade.

What does that mean? Let’s say your deposit is $1000, therefore, when you make a trade you will not lose more than $10-30. How is that regulated? By the size of lots. For example, you are set a stop-loss in the place you have to place it (in accordance with the strategy), it can be any stop: 10, 20, 60 or 200 points – it does not much matter (you determine the price for 1 point) so that you do not lose more than 1-3 % if the whole stop-loss was achieved.

1 – 3 % is a usual risk in Forex trading. 5% is the maximum you should expose yourself to. I am usually risking 2 % in a transaction. For example, in seminars and some of the broker’s courses, training, and even in books, I have heard people speak of such high numbers, for example, 10 %. If somebody is willing to take such a big risk, it means that either they person have never traded in Forex and do not understand what it is. Or he is doing that on purpose so that a trader-beginner burned his money faster. Just imagine: 4 -5 unprofitable transactions in a row (and it does happens), and you will have already lost half of your deposit.

Therefore, I recommend risking no more than 1-3 %.

While applying such simple tactics, you are not going to “burn”.To burn in that way would be very complicated, and if you do so, it will be so slow that you are practically going to fluctuate in a break-even point. All of those who burn “quickly” is because they ignore money management principles or sometimes violate them. Money management is a trade success guarantee in Forex trading, which must be properly used and it is compulsory to follow them.

If you follow your chosen trading strategy, that uses compulsory stop-losses (which is also very important), with such low risks it is highly unlikely that you will make enough transactions to “burn” the whole of your deposit.

Just believe my experience, more precisely, not believe but check – determine the risks 1-3%, begin trading: Take the most basic strategy, which is following a trend, let a price “work off” itself. If it goes to your side once or twice so that the profit is bigger than the stop-loss, you will at least be in a break-even point.

Of course, a lot of people will say that it is impossible to earn big profit with such small risks, or one will have to trade for a long time.

Yes, 1-3 % is a small risk. Yes, I understand that everyone wants to earn a lot of money immediately, however, try to understand the essence of this suggestion. While you are trading, especially during the day (Day trading) there is a huge psychological tension. It is not difficult to arrive in a situation where a series of unprofitable transactions happen and emotions cause you to lean back, and new mistakes are made. Imagine how strong your nerve would have to be to risk 10% or more of your deposit.

Therefore, an optimal version is to risk a small part of your fund. So that if a row of losses happen, you could stay calm and could continue trading. Your aim should be not to earn a lot but to earn a stable income.

For counting a lot with a determined percentage, you can download a simple indicator “Lotsize”. It is very comfortable.

Take care and good trading.

Download indicator “Lotsize”