Most people getting started in the foreign exchange business focus all their attention in learning a good Forex strategy, method or system. Most of them think that if they become able to make profitable trades they will become profitable traders and eventually trade Forex for a living… That’s where most of traders are completely wrong!

A Forex strategy, method or system it’s just an instrument to determine when a price or market conditions offer a good investment opportunity. The way we manage money is what determine if we’ll get rich or go broke trading those opportunities.

So as you can see, having a good Forex money management system is extremely important.

But what exactly is money management?

Money Management it can be a strategy or system to move money from a place to another minimizing loses and maximizing profits.

Many people think that defining their risk to 2-3% per trade and calculate the distance for the stop loss and the pip value in every trade, is money management…

And yes this is an important part of a money management strategy, but there is a lot more in it…

So, how can we manage money correctly?

In this article we will discuss a few Forex money management strategies

1) The Broker:

That’s the first step to take in consideration to manage money in Forex.

Most retail traders can afford to invest 1-5k in their business, some of them even less than 1k. Although high leverage give us the chance to buy/sell large amounts of money with a small margin deposit, not every broker allow micro accounts where a trader could buy 1K lots instead of the mini 10K and standard 100K lots.

Some brokers even support lots of 100 units of base currency, very few like Oanda will allow you to buy single units.

Micro accounts are better because they allow traders to distribute risk equitably avoiding the asymmetrical leverage, which is deadly dangerous for traders.

Forex Money Management Strategies:

1) Fixed $ Amount in draw downs:

This money management strategy is helpful for recouping quickly from losses, the trader will trade a % of the account when successful but will trade a fixed amount when a unsuccessful trade hits:

e.g.

10.000$ 2% risk = 200$ RR= 2:1 GAIN= 400$

10.400$ 2% risk = 208$ RR= 2:1 GAIN= 416$

10.816$ 2% risk = 216$ RR= 2:1 LOSS= 216$

10.600$ FIXED A= 216$ RR= 2:1 LOSS= 216$

10.384$ FIXED A= 216$ RR= 2:1 GAIN= 432$

10.816$ 2% risk = 216$ RR= 2:1 GAIN= 432$

11.248$ 2% risk = 224$ and so on…

It takes you only one trade to recoup completely from two losses.

2) Compounding

Compounding is a very powerful long term money management strategy. Basically reinvesting the gains of each successful trade and avoid making withdrawals for a relatively long period of time will boost your account like you never imagined!

3) Separated capitals

This concept allows a more aggressive trading approach.

The trader split his total trading capital in two, one for risk and one for safe.

The risk account is the 5% of the total trading capital, the rest 95% is in a separated safe account. The trader will only trade with the risk account (5% of total trading capital), but will risk 15-20% of the risk account. Each time he doubles the account he recalculates the 5% of the total invested capital and re-split the money equitably in the two accounts.

Implementing one of those Forex money management strategies or mix a few of them will allow you to maximize profits and minimize losses the best way possible.

Related Articles:

Filed under: Money Management