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Crucial Money Management Guidelines

Posted by on September 11, 2009 · Leave a Comment 

"Money is the opposite of the weather. Nobody talks
about it, but everybody does something about it"

– Rebecca Johnson



"Managing money requires more skill than making
it."

The last phrase indicates the importance of money management
in trading and this is the key skill for traders, if they
intend to earn large profits from the Forex market.

Money Management is the fundamental element of successful
trading. It is the process of planning, organizing, and
controlling money related matters in a Forex trading ‘strategy,’
in which money management plays a crucial role in helping
traders to establish a trading plan, work out their trading
capital and make investments in accordance to their risk
bearing capacity. Money management also helps in determining
the ideal risk exposure for individuals.


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Generally, money management is related to the allocation
of funds, more specifically; diversification and portfolio
management. This is the most important aspect of trading
that every trader must know, to preserve capital and make
gains.

Risk is something that nobody wants to see in their portfolio,
but unfortunately it is present in every financial portfolio
or a trading decision. To minimize or hedge the risks; money
management is very vital.

How does it relate to Forex trading?

There is a popular quote in trading that goes like; "Never
trade with money which you cannot afford to lose."
This quote is absolutely applicable here; novice traders
must follow this rule by not trading in markets unnecessarily
(or overtrading), without any clear direction or strategy.
The importance of money management can be summarized as
follows:-

1. Important in forming
trading strategies – Money management is very useful
in making trading strategies. A trading system with proper
money management can provide mammoth returns to traders
in the long term.



2. Helpful in managing risk – Managing risk is not
difficult but it is nonetheless critical. Diversification
and trading rules can be implemented to manage risk and
reduce the downsides that are associated with a trade. For
example, according to expert traders; averaging does not
make sense in a falling market but it is good when the market
goes up. Hence, when the market falls, they exit from long
positions by taking a tight stop loss. On the other hand,
if the market moves in their favor, they start adding new
positions on every upward move.



3. Helps in defensive trading - For a beginner, money
management is very helpful in defensive trading. Novice
traders can use trading objectives, limits and strategies
to remain within a moderate zone, without going overboard
with aggressive and risky trades, while they still make
good returns.

Key Takeaways

Based on the principles of money management, traders can
stop trading if their portfolio or individual pair goes
below a particular percentage of stop loss. The main motive
behind money management is to place a limit on the likelihood
and extent of losses. With the help of money management,
traders can increase the number of winning positions and
reduce losing positions, while balancing their investments
with their risk.

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