The Concepts of Money Management

The Concepts of Money Management is a study that mainly determines how much can be spent on each trade with minimum risk. For instance, if too much money is risked on a single trade then the size of a potential loss could be so great as to prevent users realising the full benefit of their system’s positive expectancy over the long haul.

A good Money Management strategy, combined with the following concept, makes it more amenable for beginners because it enables them to advance their trading knowledge in small increments of risk with maximum account protection. The important concept is ‘do not risk too much of your balance at any one time‘.

My strategy states that Forex novices should never risk more than a fixed amount of their total account on any single Forex trade and, in fact, 5% or less is the maximum advised. The risk for each trade is kept within these parameters by correctly determining its Position Size and Stop Loss. Position Size is the amount of currency to be either bought or sold. Stop Loss determines the acceptable loss a trader is prepared to take per trade.

Once a positive expectancy has been gained and the best money management strategy selected, my plan then advises live trading of the same configuration settings used during demo. Live accounts can be less profitable than demo ones because of additional difficulties such as slippage, re-quotes and larger spreads. When comparing demo and real money trading, you should determine factors such as the number of re-quotes, the number of connection errors, spreads differences and any changes in the expectancy value.

After success has been achieved with a low-risk operational configuration, higher risk ones can be introduced by altering the settings one at a time. Once you have obtained a series of successful advancements, you could then use your trading system with the following settings:-

– More than 1 lot traded, 10% of your total margin could be traded,
– More than one currency pair will be traded and more than one trade can be active.

The Concepts of Money Management