As interest in the forex trading has quite recently expanded into the retail sector, the need for educating novice traders on the use of appropriate risk and money management tactics has also grown substantially. The benefits of learning about and applying the well-established methods of protecting one’s trading capital are considerable since they can really make the difference between a successful forex trader and one that quickly sees their trading account funds disappear.
Money management is one of the most important aspects of trading but is often either misunderstood or is largely ignored. While traders tend to spend a lot of time searching or improving their trading strategies, not much of thought is given to the money management aspect of trading. For trading successfully in the forex market it is important to understand the concept of money management. Money management simply represents the amount of money you are going to invest on one trade and the risk you’re going to accept for this trade.
Trading successfully in the forex market typically means growing your trading account by wisely managing profits and losses using a sound forex money management strategy. For forex traders, the goal of money management is to maximize profitability and minimize losses while conserving trading capital, while the overall purpose of risk management is to make sure that various uncertain elements in the trading environment do not derail their chances of profitability and other measures of success in their currency trading business.
Ideally, every forex trader looking to grow their trading account should be using a forex money management system contained within a trading plan that objectively lays out their goals and how they intend to manage their trading activities. Of course, the actual details of each trading plan will differ according to each individual trader’s personality, choices and preferences, but every such trading plan should lay out the money management techniques the trader creating it intends to use.
The ideal and widely accepted concept for trading is to always take a 1:2 risk/reward set up. This forex money management rule means that if you risk $100 on a trade, then you should ideally make $200 in profit. This is an essential element to money management and one which combines both the money management and the trading strategy aspect. The 1:2 minimum risk reward ratio is used because for every winning trade, you can recover the losses from the previous losing trade and make a profit as well.