Using Forex trading systems can be a good way to profitably trade the dynamic and fast-moving Forex market. However, if you do not learn to trade Forex market with money management rules, you could quickly blow up your account. Here are a few things to consider about the importance of money management in Forex trading.
Risk Percentage
Regardless of how good of a system you are using, it will not be profitable unless you are using money management rules. Before getting involved with a live account, you need to set up some rules that you can follow for every trade. Many professional traders use a rule that they will only risk a certain percentage of their account on any given trade.
For example, you may decide to risk a maximum of 2 percent of your account balance on any given trade. If you have a $10,000 account, this means that you will only risk a maximum of $200 on any single trade.
Making the Calculation
Even though you may understand that you can only risk a certain percentage of your account on each trade, you may not know how to go about calculating this on each trade. In Forex, you have to place a trade with the appropriate lot size to ensure that you only risk a certain percent of your account.
You can use one of the many Forex position size calculators available online for this process. With a Forex calculator, you will enter the size of your account, the percentage of risk that you want to use, the currency pair that you are trading and the current market rate of each currency. The calculator will then tell you the exact lot size that you need to include in your trade to risk the appropriate amount. It may also compute the number of dollars that you are risking with this trade.
Sticking to the Rules
Setting up some rules for your trading is a great idea and it can pay big dividends for you in the future. However, if you cannot stick to the plan that you set forth, it will not do you much good. You need to be able to stick to the rules at all times.
Many people who set up trading rules get tempted to risk more of their account after winning a few trades in a row. You might think that trading is easy and you are more likely to win. In this situation, you should resist the temptation to increase your risk and stick with the rules.
If after a certain amount time, like several months, you feel like you could increase the risk, then you can make that decision. Just do not rush into increasing the risk after a few good trades.
Luke Arthur is passionate about the Forex market and helping others make the best decisions when trading. Are you tired of being confused about the Forex market? While it can be a rather confusing market to trade in, you can learn the basics with the right resources. If you want to know more about the Forex market, be sure to check out the resources at Forex Trading Rookie.