Next to learning a profitable trading strategy, money management is the most important factor in determining just how successful you become as a trader. Money management is all about asset protection. That means using stop losses, to limit the damage, and calculating just how much you should wisely risk per trade. Money management describes the actual method of determining the position size under certain, but specific, conditions.
Since trading is inherently complex and unpredictable, losses are inevitable. Successful traders are those that master the skills of restricting their losses by controlling them properly. This is the prime reason for developing a sound money management policy, which is a strategy enabling you to maximize your profit potential at minimum risk. The proper application of money management gives a forex trader an account growth edge, while trading forex without a logical money management strategy typically amounts to little more than gambling.
The principles of money management address risk from the perspective of the trader, relating the marketplace to both the adopted trading methodology and the trading capital. It is important to remember that the result of a specific trade is dependent upon many variables and remains an uncertainty until its end. In any trade, the element of risk is very real and nobody can guarantee profit or guarantee against loss. The risks can be mitigated, but not eradicated, through the use of a well-designed money management strategy.
It is important that all traders have a money management technique and that it is carried out with consistency. On of the most important aspects of money management is ensuring that the traders live to trade another day no matter what happens on any individual trade. Anything can happen at any time in the markets and using a sensible money management technique ensures that the trader will be able to trade again no matter what happens.
The question of what type of money management strategy to employ depends greatly upon the personality of the trader and the overall scope of the trading operation. Conservative strategies, such as flat risk, may suit some trading operations well. Conversely, well-capitalised traders may have the purchasing power and ability to employ more aggressive approaches. No matter what style of money management is adopted, it is imperative that it fits the trading methodology, capital inputs and goals of the trading operation as a whole.