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. Why? It is because they either did or did not stick to their money management systems. A seasoned trader may have a very good idea about where a market is headed, something he is almost certain of but if he gets in a little to early on the trade with way to much at risk he may get a margin call before the market moves in his favor. On the other hand the guy who knows nothing but uses money management may get in the same market at the same time on the same side and end up making money because he was able to hold on to the trade he was in untill it became profitable.

You may have heard someone say over the years the key to making money is not losing it. That doesnt mean you shouldnt take risks at all and not trade, it just means you shouldnt 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 margin account. After a few losing trades coupled with poor money management in a row you need a miracle to recover. Even if you do know lots about the market you trade you will need lots of wins 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 to trade like that.

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 damage that is inflicted on the person as well.

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. So people say the magic number is 5% others 3% and others even 1% of their account balance on each trade, the amount varies with each individual. Find your own comfort level and stick with it.

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. That it will take many stop outs in a row to cause a large drawdown in your account to occur. Do not worry about your stops being hunted, I only recommend brokers who do not hunt stops. One of them, Crown Forex even guarantees no slippage on them. How you determine where your stop is placed is up to you, whether it is based on technical levels or a predefined number of points, just remember to take into account the market volatility when placing them.

A great example of sound money management is tightening your stop to your break even price if the market does move in your favor. When placing trades it is also important to have a profit target which will give you a positive risk to reward ratio. While you can make money by risking more than you plan to make on a trade it is a lot of work and usually not worth the effort. Since one losing trade can erase a week or even months worth of winning trades. It is preferable to have a risk to reward ratio of 4 to 1 or better so that if only 25% 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 as long as the trades are the same size if your risk to reward ratio is 4 to1.

Utilizing money management is a lot like exercising and eating right. Something we all know we need to do but something most people either give up on or dont attempt. That is why most of us dont have the bodies we want, and why most of us dont have the size trading account we want. It may be hard or no fun sometimes, but it is ultimately rewarding and will provide us with the longevity and quality of life we desire.