Forex Street

Forex Money Management. Trade safe building stable gains

<>Money management is a way traders control their money flow: in or
out of pockets... Yes, it's simply the knowledge and skills on managing a
personal Forex account.

There are several rules of good money management:

1. Risk only small percentage of total account

Why is it so important?

The main idea of the whole trading process is to survive!
Survival first,
and only then making money on top.

One should clearly understand, that Big
traders first of all are skillful survivors. In addition, they usually have deep
pockets, which means that under unfavorable conditions they are financially able
to sustain big losses and continue trading. For the ordinary traders, the
majority of us, the skills of surviving become a vital "must know" platform to
keep trading accounts alive and, of course, to make good stable profits.

Let's
take a look at the example that shows a difference between risking a small
percentage of capital and risking a bigger one. In the worst case scenario of
ten losing trades in a row the balance of trader's account will suffer this
much:

Trades Account balance Risking 2% of total account per trade 1 Start — 5000 100 2 4900 98 3 4802 96 4 4706 94 5 4612 92 6 4520 90 7 4430 89 8 4341 87 9 4254 85 10 4169 — 17% of the account has been lost

Trades Account balance Risking 10% of total account per trade 1 Start — 5000 500 2 4500 450 3 4050 405 4 3645 364 5 3281 328 6 2953 295 7 2658 265 8 2392 239 9 2153 215 10 1938 — over 60% of the account has been lost

Apparently, there is a
big difference between risking 2% and 10% of the total account per trade. A
trader who has made 10 trades risking only 2% of balance per trade, under the
worst conditions would lose only 17% of the total account. The same trader who
had been exposing 10% of balance per trade would end up with loss of over 60% of
the total account balance. A simple money management rule — significant results.