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Money Management

Let’s say two traders who are just starting out, each take an opposite side of a Forex trade. Odds are they will both end up losing money on the trade, because they have no idea how to manage their money. Money management isn’t always the sexiest action to take, but it is the action that is going to have the biggest affect your bottom line. Now, take two experienced traders and have them take the opposite side of a trade; they will more times then not, both make money on the transaction. Money management is the difference between a veteran trader and one just starting their Forex career.

Money management can be a nuisance because it requires a trader to continuously monitor their positions and take losses when they need to. What inexperienced traders fail to realize is that taking losses is the key to having long-term success in Forex. Many traders just do not have the necessary discipline to practice money management on a consistent basis. They often only learn this lesson after experiencing a very big loss. Experts say a beginner should never risk more then one percent of their total equity on any single trade. This approach works because a trader can be wrong twenty times in a row, yet still have 80% of their equity left. Often times traders should only use their speculative capital when beginning to trade on the Forex market. It is important for inexperienced traders to choose a monetary number they are willing to lose because often they will lose that money right away. Whenever anyone tries something new, they are going to take their lumps early especially when they involve themselves in Forex.

There are two different way to implement money management into Forex. One way a trader can practice successful money management is to trade often in small stops and attempt to save their profits from the winning trades. Another way a trader can save money is to go for small gains and take infrequent, but large stops. With this method traders hope that the small profits will accumulate and outweigh the few large losses they will incur. The differences in these approaches depend on the mindset a trader has. Traders have all kinds of mindsets and can handle different forms of losses. The first method will cause minor pain because the losses are small, but they will be more frequent. Traders will also have a few moments of great excitement when they hit it big. The second strategy will involve small doses of happiness involving wins and will include big losses that will cause a lot of anguish. It is possible to lose a week or even a month’s worth of profits in one or two trades.

These are the two major ways a trader can manage their money in Forex and make sure they earn money and not lose it all. There are definitely options and Forex is very flexible and as varied as the market itself. The cardinal rule is that all traders in the Forex market must incorporate some sort of money management in order to be successful.

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