Money Management
Neglect this at your own risk!
The following information is one of the most important factors in trading. It is this simple. Capital preservation is the cornerstone to any trading plan. The market will always be there tomorrow. However, will you? This is the big question.
There are many theories as to how much should be risked on a trade. How much capital is needed to start. Or, how much profit to take out on a trade. These are all money management issues that we will try to shed some light on.
How much capital should one start with?
This depends on what level of trader you are. If you are just beginning, start with a small amount of money. For example, $200 in a micro account. But, most of all, do not trade with money you can not afford to loose. Any money that is used for trading is business capital, and should be treated as such. There are firms that will accept beginning deposits of $50. So, you can start very small.
Starting with a small deposit is not a bad way for a new trader to start. This is a cheap way to get used to order execution, live market behavior, and mistakes. Yes, mistakes. Everyone makes them. Why not make them when they will not cost you a ton of your money. You can always move on once you are confident in your order execution and market behavior.
For the more experienced trader, how much to start with, it is completely different. The rule of do not trade with money you can not afford to loose still is the same. However, $5,000 on up is needed to make any money worth your time. If you are trading part time, then $5,000 is enough to start with. But, if you are going to try to make a living, you will need much more.
For a full time trader to make enough to live on, and ride swings in equity, a substantial investment is required. A minimum of $25,000 is required. However, $50,000 would be more of a safe start. There will be lulls in income. And believe it or not, losses. Yes it is part of the game also. You need the capital to ride the storms. And a budget to grow your profits.
How much to risk on a trade?
The answer to this question is easy. 1% to 3% on any given trade. Currency trading allows ample opportunities to make profits. Do not just blow your capital. If you do. You will not have any money to trade with when the good trades come. Failure to exercise discipline in your forex trading money management plan will end disastrously.
Why not 5%, or 10%. Because. It is a mathematical fact that not risking more then 3% on each trade works in your favor. You will have losses. And the more you risk the more you may loose. Then in turn, you will have to make incrementally more profits just to break even. Are you starting to get it?
If your trading approach is profitable, you will make money risking no more then 3% of your capital. And you will absorb the losses better. There has been much research done on this topic, and plenty of resources to review. After much research, and effort, you will most likely arrive at one conclusion. That it is best to not risk more then 3% of your capital on any one trade.
We are in the process of reviewing case studies and examples to add for this topic. Forex trading money management is one of the most important aspects to your success as a forex trader. Please make it the number one aspect to your trading approach. If you do not have any money, you can not trade. The rest is easy. (Just kidding)