What is Money Management?

Although you may think the title of Money Management is pretty clear and easy to implement – how to manage your money and invest wisely, it is slightly more than that. It is the educated process of how you save, invest, budget and spend domestic income. This can also fall on overseeing money usage for a business too.

Everyone in some form or another practices money management in day-to-day life, whether in their personal capacities or with investment management such as trading forex and CFDs successfully.
Trading forex and CFDs successfully does require discipline. You’ll need a proper knowledge of the basic elements that are vital if you are expecting long-term gains from this industry.

Inexperience is possibly the main reason for traders losing money in forex and emotional trading.

Neglecting your money management principles may as well as increases risk and decreases your reward.

As forex is extremely volatile at the best of times, therein lies an inherent risk, and having correct money management skills are essential when entering the markets.

Risk Management

When entering in to a forex or CFD trade, there needs to be a certain understanding, that you will enter risky situations and accept this as a prerequisite for leveraged trading. There are many risks when trading, however, there are various ways to reduce these risks.

While your profits are generally connected to the risks, here are a few principles:

• Practice position sizing
• Recognize your trading risks
• Analyze and evaluate those risks
• Establish solutions to reduce those risks
• Apply and manage those solutions on a constant basis

Position sizing can be approached in a few ways, as simple to as complex as you choose, as long as it is best suited to your platform. This way you are able to easily manage both the losing trades and the winning ones. There are three models we can follow:

 

Fixed lot Size

Great way for beginners to start their trading careers. This means that traders will trade with the same position size, probably small. Lots can be changed during the trades according to how the account increases or decreases during the trading period. The account size is important when starting out, keep it small and use a leverage of 2:1, this way you can steadily grow potential profits over time.

 

Equity Percent

The idea behind Equity Percent is based on the size of your position based on the percentage change in equity. It is best to determine the percentage of equity for every position and this will determine and allow for growth of equity in relation to position size. One can always increase the percentage of equity used for every trade, but it is not without mention, that the higher the profit potential, the higher the risk.

What is a safe percent of equity to trade with?
It is often advised to trade with a smaller percentage of equity such as 1% or 2% that equates to 50:1 leverage per trade also allowing you to stay in your position for a longer period of time. Simply put, keep the size of your trades proportional to your equity, if you enter into losses, the position size is reduced preserving the account from depleting to a zero balance too rapidly. One can also reduce the size of the initial trade when you enter a losing streak to minimize the equity damage.
Remember that breaking even after losses takes more time than losing the same amount.

Advanced Equity percent with stop loss

The methodology behind this technique is to limit each trade to a set up a portion of your total account equity, this is often between 2-10%. This method differs from Fixed Ratio in that it is usedin trading options and futures and helps you increase your exposure to the market while protecting your accumulated profits.