Money Management- I have dedicated this area of the page on this site to money management because it is the most crucial thing you must master if you want to become a successful spot forex, spot metals, CFD, or commodity trader. This is mainly because when you trade these instruments you typically trade on margin and leveraged investments can get out of hand very quickly if you let them. I have seen people who had no clue about forex trading but who had a firm grip on money management make large profits in currency trading. I have also seen traders who know the market better than they know themselves lose money because of a lack of it. You may have heard someone say over the years the key to making money is not losing it. That doesn't mean you shouldn't take risks at all and not trade, it just means you shouldn't take foolish risks. Take a look at the table below, so that you are sure to understand what I am talking about.

Taking a big risk on a single trade can easily cost you 25% of your account. After a few losing trades coupled with poor money management you need a miracle to recover. Even if you do know a lot about the market you will need many winning trades in a row to get back to square one. It is not worth the time, effort, or stress which is also very bad for your health.

The big problem is that people get emotional when they have large amounts of their money in a trade. When their account balances begin to fluctuate wildly their moods change dramatically, from greed and arrogance, to fear and anger and back again. It becomes very hard to act rationally in those situations and people usually do not do what is necessary to be successful as a result. This type of trading almost always results in the person losing everything they invested. Not to mention the psychological wear and tear that results.

One way to avoid all this is to risk an amount so small on each trade that it will not affect either your account balance or your mentality much at all. Another option is to use a professional money manager like those we work with to ensure your emotion does not prevent you from profiting. Another way to manage your money is to use stop losses on your trades which if hit will only cause a loss of some small percentage of your account. This way you can withstand many losing trades. Do not worry about your stops being hunted, I only recommend brokers who use ECN and STP order routing. How you determine where your stop is placed is up to you, with the most popular being technical levels or a predefined number of points. Make sure to factor in market volatility when placing them.

A great example of sound money management is tightening your stop to your break even price when your trade becomes profitable. When placing trades it is also important to have a profit target which will give you a positive risk to reward ratio. It is preferable to have a risk to reward ratio of 2 to 1 or better. That way if only 33% your trades of an equal size are winners you can still break even on your account. If you are right half the time then you are making money with a 2 to 1 risk reward ratio.

Utilizing money management is a lot like exercising and eating right. Something people pay lip service to but don't practice. That is why most of us don't have the bodies we want, and why most of us don't have the trading profits we seek. It may be hard or boring for us, but it is ultimately rewarding and will provide us with the longevity and quality of life we desire.