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Basics of Forex Money Management and Capital Management
By Forex EA Systems

Forex money management is the base of any forex trading system, which helps traders to get profit transacting on exchange. Especially money management is important when you trade on FOREX, which is considered to be the most perspective to get profit but at the same time the riskiest, because more probabilities to get money, more probabilities to have losses.

 

So, if you want to trade on FOREX, you should realize that it’s very important to have an effective strategy of management. Working with margin trade, money management guarantees secure existence for a trader. Parity between average profits and losses should be strictly observed. In this case, trader doesn’t play with his equity, his works with it! Success of each person depends on individual features of each trader on FOREX. Therefore, every trader makes his own trading strategy, based on FOREX money management.

Considering money management, let’s see the main fundamentals of this process and practical advices on formulating your own money management system on FOREX.

1. Necessary reserve, needed for unusual situations, should be not less than 50% from invested equity. It’s the first rule of margin definition for opening of orders. However, many analysts advise even less 5%-30% from invested capital for safe operation.

2. One principle helps to avoid bankruptcy: try not to invest more than 10%-15% for one market and not to invest more than 15% into one order.

3. To consider the norm of risk as 5% of invested money. In these case trader losses small part of his equity with the unprofitable order.

4. Don’t forget to use optimal investment of the fund, it should be diversified in some degree. In this case, losses of one order can be covered by profits of another.

 

5. Money management should be executed with the concentration and diversification. If you open orders on some different markets at the same time you can reach the safe allocation of funds.

6. Definition of stop loss and take profit levels. When you are offline, put your stop orders, in order to avoid huge losses or even bankruptcy or get additional profit. Making it, analyze the situation and predict the future movement of price, according to the indicators and valiality of the currency pair.

7. The definition of possible loss or profit. Consider the chance to get profit against loss as 3:1. If you can’t do it, don’t open the order.

Realizing FOREX money management, should seek to bring profit to the maximum, keeping profitable orders as more as possible. Therefore, making some profitable orders you can have goods results.

8. Try to follow the rules of opening and closing the orders.

9. Don’t try to revenge. In this case, you are impressed and can’t analyze the situation. There is a well-known joke: “dad didn’t scold his son that he’d played cards, but about, he revenged.”

10. Timely rest. Don’t work when you are exhausted, no matter how tempting the situation may seem.

Considering these rules and advices, you can trade profitably on FOREX and try to develop your own money management strategy, that possibly give you good profit in the future.

article by Forex EA Systems

 

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Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts