Money management guide

Money management is very important if you are a trader, whether you are stock trader or forex trader. By using money management you can stay alive longer in the game.

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  From the image above you can see the result of two trader. The first trader risk 5% of his money each trade. The second trader risk 10% of his money each trade. You can see that after 10 loss trade, first trader will have more money left. You can see the importance of money management from the illustration if you have bad luck and loss ten trades in a row. Lesson learned: Always risk a small percentage of your money, below 5%. A good trader will know that you will not always win, so you must risk a small percentage of their total money so that they can survive those losing streaks.
• Before enter a trade you must calculate the risk / reward ratio. When chances to win a trade is smaller than potential losses, don’t trade! You should only trade if the risk ratio is 1:3. For example if broker fee or spread is $3, and you only want to lose $3 for a total of $6 ($3 + $3) loss, then you will only close position when it loss $3 and win 3 * $6 = $18.
• You should set protective stops for your trade. Remember the 1:3 risk ratio? You can set the level you want to cut loss from that number.