Money Management 101!

If you've been trading a while or have been reading up on trading then the term money management will be familiar to you. But money management in Forex trading is very different from money management else where. Especially in currency trading money management takes the top spot for making or breaking an account! Just what exactly is money management you ask?

Well money management is a series of steps an experienced trader takes to protect the profits gained and to ensure that losses are minimized. To give an example money management is the safety net for a trader to make profits. For instance you are a day trader and you trade the 5 minute charts. So let’s say on the average you make 10 trades a day. Now your daily tally should be the average score of all 10 trades. Thus you will have a daily pip profit and not base your success on individual trades Money management is also concerned about position sizing. This is the way professional traders control their risks and returns for any given trade.

To learn and use position sizing is thankfully straight forward and simple. Take for instance you trade the Cable (Pound against US dollar). Each lot you trade is 100k how you can mitigate your risk is by breaking up the size of each lot you trade in. By diversifying your lots you give yourself the flexibility to hedge your position should a trade turn against you. In that way you can position your trades in uncorrelated economies thus increasing the probability of a day profit. Money management in this way will serve to protect your account. Over here it is appropriate to touch on the compounding effect and how it works with money management. As you are aware a trader makes money by steadily growing his or her account. Steady growth for day traders do not mean a profit in each and every trade. But you have to ensure a profit every day. The worse position is a break even. When compounded and coupled with position sizing the trader grows his or her account.

Words of caution here do not expect to make every trade a winning trade. If you trade 10 times a day you have to expect to have 50% of your trades as failed trades. If your edge is good and you have made a due study of the market, expect a failure rate of 35% and that's saying you're a very good trader already! In conclusion let up recap on what money management is and what it can do for you. First money management is a process of controlling risk. Second it is a method of increasing profits. Third it is a way to discipline a trader. Fourth it is not a way for quick bucks. Fifth it will enable a small account to compound at the best rate possible and earn consistently. Lastly coupled with position sizing it gives to the trader flexibility to hedge their trades thus ensuring a daily profit. So make some money for yourself.