Money Management in the Foreign Exchange Market

Efficient money management distinguishes between winning and losing traders. Money management is the most significant part of any trading system and most of traders don't understand how important it really is. It's important to understand the concept of money management and know the difference between it and your trading decisions. Money management represents the amount of money you are going to put on one trade and the risk you will accept for this trade.

There are a number of money management strategies and they all aim at preserving your balance from high risk exposure. For starters, you must understand what Core Equity is. Core equity equals your starting balance, less the amount in open positions. For example, if you have a starting balance of $20,000 and you enter a trade with $2,000 then your core equity is $18,000. If you enter another $2,000 trade, your core equity will be $16,000. It's important to understand what's meant by core equity since your money management will depend on this equity.

Many believe your risk per trade should never exceed 3% of that trade, but advise that it's better to actually adjust your risk lower to 1% or 2%. It's very important to never risk too much in a single trade. Don't let greed and your emotions get in the way of making wise trading decisions.

In currency trading, you should diversify your trades between several currencies. Trading one currency pair will generate few entry signals. Always remember that when entering a second trade position and so on that you should calculate your risk based on your core equity, not your starting balance.

Another strategy is to only risk 1% of your starting balance. Then base all of your other trades on your profits, not your starting balance.