The Rules of Forex Trading Money Management

In the emerging field of financial psychology, study after study has proven that, even with winning odds as high as 60%, only five percent of traders will be in the black by year s end. Despite the 60% winning odds, the losing ninety-five percent have never learned money management, and this isn t just theoretical FOREX speculation. Money management is the most important part of any trading system, and surprisingly, few traders understand how valuable a tool it truly is. Put simply, money management is the money you are going to put on a single trade and, conversely, the amount of risk you are willing to take for this trade. There are lots and lots of money management strategies (likely, as many as there are financial strategists) but they all have one central theme: preventing high risk exposure. The One Percent Risk Rule Much akin to the golden rule of ethics, the one percent rule has saved many a trader quite a bit of coin. Basically, the beauty of the system is in its simplicity; adjust your risk for every trade to roughly 1%. If you ve got the stomach and the confidence in your system, your risk per trade can go as high as 3%, but anymore and you re gambling, not trading. For example: 1% risk of $1,000,000 account is equivalent to= $10,000 Your stop loss should be adjusted so that you never lose more than $10,000 per single trade. Simple, right? Then why don t more people adhere to the One Percent Rule? The fact is, people in the trading business are not looking for steady low-risk growth over the long term. They re results oriented and many feel that if 1% risk creates moderate profits, how much more with 5% or even 10% create? This type of reasoning has lead to much more popular theories. The Martingale Strategy Any gambler can tell you about this strategy. The premise is simple: as you lose more, increase your risk. If you re sitting at the blackjack tables and you bet $50 and lose, bet $100. Lose that, bet $200 etc. The philosophy is that after enough losing hands your chance to win is much larger so you can add more money to recover any losses. But here s the dirty little secret that makes the casinos the millions of dollars a year: your odds are the same no matter what hand you play. Your odds start over on every hand and what you ve done previously or what you ll do in the future makes no difference. Many novice FOREX investors try this strategy in their trading and predictably, lose a lot of money in very short amounts of time. The Opposite of Martingale Another popular strategy is the Opposite or Anti-Martingale Rule. This rule maintains that you increase your risk when winning and decrease your risk when not winning. For example: A trader starts with $1000 and his trade size is $100. After a year, his balance is up to $2000 so his trade size should go up to $200. Not a bad strategy, eh? It s strength lies in its simplicity: the more you win, the more you bet. It s a higher risk strategy for traders looking for a higher return but still wanting to maintain their initial balance. A tried and true method many a trader has used on the road to riches. Kevin Davis has been investing online for 10 years and just recently started looking into expanding his investments into the FOREX market. To learn more about the forex market join Kevin inside the membership site, lots-of-pips.com