Proper money management is essential to prevent losing one’s shirt within the forex trading market. Placing ill-considered trades and risking more than a calculated percentage of one’s funds, the two most common money-management errors, will rapidly result in a financial wipeout, whereas following the laws of probability can result in, if not an equally rapid growth of equity, at least not a total or irredeemable loss.

Having the occasional forex trade head south is a foregone and inescapable conclusion; however, with proper money management techniques, the financial effect of these inevitable losing trades can be minimised and a profit earned despite the whims of this currently choppy market.

Money management rules include:

• Never risking more than 3% of one’s capital at any given time;
• cutting one’s losing trades and letting the winning ones ride;
• following the 2:1 or better yet the 3:1 risk-reward ratio; and
• keeping emotion out of the forex trading market.

Many forex trading platforms advertise that one can open an account and begin live trading with as little as $500. While this is certainly true, 3% of that amount is $15 and if a trader does begin at this level, he or she must begin as a scalper or day trader, for every stop-loss must be kept very tight indeed if no more than $15 may be put at risk. It’s also important to understand that this is not 3% per trade, but 3% at any given time, no matter how many trades one wishes to have open while the market is moving.

What this money management rule is designed to accomplish is the preservation of one’s capital for as long as possible. Because losing trades are inevitable even with the most foolproof strategy, and numerous successive losing trades are possible within this choppy market, if each such losing trade only claims 3% of one’s capital then the account has not been emptied even after taking several hits.

The flip side of this trading coin, the risk-reward ratio, means that for every 3% put at risk, the reward must be at least two or three times that amount. If the stop-loss must be placed so that no more than $15 can be lost on a trade, then the take-profit goal, often determined not by the trader’s wishes but by the support or resistance levels extant, must be at least $30 or $45. Following this rule, if a trader wins only half the time, his or her winnings will be two or three times the amount lost, making forex trading the only game in town where being right only half the time is all it takes to turn a profit.

The final rule, to park one’s emotions prior to trading, is perhaps the most important rule of all. A trading strategy is only as mathematically dependable as the mind implementing it, and emotions can only skew the results achieved. Anger or fear over losing money, or patriotic pride or despair at a nation’s currency’s standing in the international marketplace, must not be allowed to influence a chart reading or a trading decision. When emotion takes over, only the market can win.