Dynamic Fibonacci Grid Forex Trading System

Currency Trading: Money Management For Profit

Currency Trading: Money Management For Profit

In this currency trading tutorial we will look at how to manage your money in order to have the best chance of making profits, rather than losses. We all know that forex or currency trading is risky, but there are many things that we can do to reduce the risks.

Most new traders spend too much time looking for the perfect system and not enough on other aspects of their trading. Having a system that ‘works’ is not a guarantee of a smooth ride to millionaire status, just as having a car that works is not a guarantee of a smooth ride to the next town. You also have to know how to drive it and which road to take. Two different people will not drive that car in the exact same way and they may not have the same results.

In fact we can take the analogy a step further and it will illustrate the point even better. An experienced driver takes that car and drives it carefully and safely to the next town. No problem. Then we have two beginners. Let’s forget about the driver’s licence for a moment.

One beginner takes a course in driving before he ever gets inside the car. He probably makes it to the next town too, maybe after a few wrong turns, maybe with a couple scratches on the paintwork, maybe a little late, but he arrives in the end. But the other beginner jumps straight in the car with no tuition, heads for the first road that he sees and ends up either in the wrong town or more likely, in the ditch.

And remember, that was the same car. In the same way we can take the same forex system, give it to three different traders, and see three completely different results.

So what do we need from a currency trading tutorial and other forex courses? Just like with the drivers, knowing how to operate the system is only a small part of our training. Risk management is what is most likely to prevent us from finishing up in the ditch.

Let’s take an example. Say you have a system that makes an average of 50 pips profit on winning trades and 30 pips loss on losing trades, including the spread. Around 50% of its trades are winners. It’s clear that this is a good system. It should make profits in the long term.

However, if you start out thinking you have a 50% chance of success so you can risk 50% of your funds on each trade, you would be making a big mistake. 50% winners does not mean that every loss will be followed by a win and vice versa. There could be 2, 3, 4, maybe occasionally even 10 losses in a row. Or you could have 5 losses followed by a win followed by another 5 losses.

Later, of course, it would even up and you would have a run where there were more wins; but if you were placing 50% or even 20% of your account balance on each trade, you would be wiped out long before the wins started coming in.

A better risk in this situation would be 5% or even 2%. At 10% the trader would probably still be wiped out sooner or later. You can check this out against back tests, but always double the worst situation that you see because it is almost certainly not the worst that could happen.

Money management is something that has to be learned by any beginner trader. You can see from this article why it is important to take a currency trading course of some kind before you start trading.

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37 comments

  1. Ira Radatz

    I loved studying, brought me back to early stages with my firstly forex trading ventures, it is essential to observe forex trading plan,with out it it’s exhausting to earn pennies!

  2. Dino Vedo

    I’ve been into blogging for quite some time and this is definitely a great post. I signed up for your newsletter, so please keep up the informative posts!

  3. Sheba Lydic

    Is there a stop to the euro weakness? The Euro dropped currently under 1.19 :-O

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