Money Management In Forex Trading

Money management in Forex trading and market isn't your usual way of budgeting your daily cash. While it does involve allotting how much to which, it's certainly more complicated and there are different money management strategies that a Forex trader could adopt.

Money Management DEFINED: This is a subsystem in the Forex trading industry. Depending on the strategy you adopt, money management tells you how much you should risk when you get an entry signal from the trading system. It also tells you the money you need to put on a single trade. With a lot of financial strategists spending every waking moment of their lives to find a way to 'tip the balance to their favor', it's natural that you would find different strategies for money management. However, all of them have one central theme; to prevent exposure to high risk.

Money Management Strategy 1: Martingale

You can ask any gambler around and, believe me, they know what this strategy is about like they would know their ABC's. The idea is straight forward and simple: as you lose more, you increase your risk. For example, if you risk $50 and lose, you need to bet $100 on the next turn. If that doesn't quite work, bet $200. After a long enough losing streak, theoretically and statistically, you will win. And, if you have doubled your risk right from the onset, that single win could recoup your initial loses and, if you are fortunate enough, even gain some profit.

The question, however, is this: do you have enough to finally win and make it back? Unless you have an unlimited amount of money to spend, this is hardly a reliable strategy. There are a lot of newbie Forex traders who adopt this strategy. Unsurprisingly, it leads not only to great losses but, much worse, to wipe-outs!

Money Management Strategy 2: Anti-Martingale

The anti-Martingale is the opposite of the above money management strategy. The idea is to increase your risk when you are winning and tone it down when you are losing. Like the Martingale strategy, this is high-risk, but it's perfect for traders who want higher returns while still keeping their initial balance. There are many experienced Forex traders who adopt this money management strategies, and with good results!

Money Management Strategy 3: One Percent Risk Rule

This system has saved many traders from total bankruptcy and wipeouts. The beauty in this strategy is that it's simple and effective. The name says it all: for every trade, you should adjust your risk to roughly 1 percent of your account's balance. Here's an example: let's say your account has $1,000,000. One percent of it is equal to $10,000. That means your Stop Loss should be tweaked so that, for every trade you go into, you will not lose more than $10,000. Simple and effective, indeed, but why is it that only a handful of traders adopt this? The answer is that they are not looking for moderate profits. They want to hit it big in as little time as possible.