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Lesson 13 – Forex Money Management

One of the most important components of a successful trading plan consists of a comprehensive money management structure. Money and risk management make up two of the prime ingredients for success in the Forex trading. Even the best trading strategy in the world will fail to make you money in the long run without a solid money management plan.

Not paying attention to risk and money management can lead to unsustainable losses in a trading account. This can ultimately result in the complete loss of your funds, along with your trading confidence. We like to call it blowing your account.

Money Management in Forex Trading

The importance of a comprehensive money management component in a trading plan cannot be stressed enough. A person who begins trading without a trading plan and without a form of risk management is not trading but gambling instead.

A trader will typically have a clearly defined plan for both making money and for preserving their account by limiting their risk in the case of adverse market movements.

Money Management Principles

A number of important money management principles or rules would be strongly recommended for the trader to consider incorporating into their trading plan.

These principles might include the following:

  • Trade with money you can afford to lose. The first major rule of thumb in money management is to avoid trading with money you cannot afford to lose. In other words, refrain from trading with your household’s mortgage, food money, taking on any sort of debt including overdrafts or making use of a credit card to fund your Forex account. Only use funds you can safely put at risk.

Essentially, placing money at risk which would otherwise be used for basic necessities can cause undue stress on just about anyone. As a result, this stress tends to affect the capacity of the trader to make sound market decisions.

  • Position Sizing – Knowing exactly what percentage of the account is at risk at any given time is done through determining the size for each position that will be open, with only