A comprehensive trading plan wouldn’t be complete without a money management plan. It serves the same importance as Forex trading strategy. What is FX money management? It is actually a set of rules and processes used by FX traders to manage their finances while trading in the FX market.

The main principle of money management in FX is to preserve the trader’s capital. But that doesn’t mean that the trader will never have to lose a trade. Losing is married to trading. What you can do is minimize the trading losses and make them manageable for you as a trader. When a loss is properly managed, you can still cope and become profitable despite the losses that you had.

The Link Between Money Management and Risk Management

There is a close relationship between money management and risk management. The definition of risk management is how traders can manage all the risks associated with trading. Money management, on the other hand, is the proper use of your funds so your account balance will grow without having to put it on undue risks.

Can you stop losing money while trading currency?

There are common mistakes that must be avoided when trading currencies. As we are just humans, it is our human nature to involve our emotions when we trade. Successful traders don’t recommend this because it will only cloud your good decision-making. Additionally, to succeed in trading currencies, you also need to treat it as a business. If you look at it as your business, your aim should be to earn money and not to lose your funds. You will find ways to avoid losses because a business wouldn’t be successful if you keep on losing.

Is it possible to lose all your funds in currency trading? That is definitely right! In fact, not just in FX, you can lose money in any investment if you don’t pour your heart into it. You have to take extra time to educate yourself about your business and find ways to maximize your profits. Developing a good trading strategy is a way to minimize losses and money management is a huge part of a good trading strategy.

Money Management Rules To Follow

There are certain money management rules that you need to do before every trade.

Identifying the Risk Per Trade

The main idea here is to only risk a small percentage of your overall funds in your account in one trade. There are these ‘2%’ rules which successful traders often preach. In this rule, a trader should only risk 2% of his account in every open trade.

Assigning a Risk/Reward Ratio

The number one rule described in trading books and informative articles says that a trader should have winning trades twice as big as the losing trade. This way, you won’t wipe out your account despite having losses. It is also recommended to have a risk management tool when trading Forex. This will stop your trade whenever a specific benchmark is reached.