One of the most exciting aspects of FOREX trading is the incredible leverage available. For most FOREX brokerage firms the margin required to trade a $100,000 position is $1,000. This gives you leverage of 100:1. Think about it. You are controlling $99,000 of other people’s money with only $1,000 of your own money. To me, that kind of leverage is amazing. Many of the mini-accounts that allow you to trade $10,000 lots with a $50 margin deposit. This leverage is even better. It is 200:1. You are controlling $9,950 of other people’s money with only $50.00 of your own.
However, that kind of leverage also requires that you manage your account carefully, or a few losing trades will shut you out of the market entirely.
Successful traders agree that money management is more important than your trading system. If you have a system that results in winning trades around 60% of the time and have manage you money wisely, you will grow wealthy. However if you have a system that results in winning trades 80% of the time and do not use wise money management practices, a large percentage of you will leave the market losers.
So how much should you risk on any given trade?
One market rule is the rule of 10. Do not risk more than 1/10 your capital or 10% on any one trade. I, however, consider this strategy too risky. My rule is never risk more than 2% of my capital on any one trade. If you are just starting to trade a mini-account you may need to raise this to 5% but never, never, never go higher than that, and after your account reaches $1,000, drop back to 2% of your capital. With the rule of 10, it would take only 10 trades to wipe out your account. At 5% it takes 20 trades to wipe out your account. With my rule, it would take 50 losing trades to wipe out my account. I ask you, which risk level seems wiser?
Another important point to remember for risk management is that markets trend together. If you decide to take a position in USD/EUR, then USD/GBP and USD/CHF should not be considered different positions. If you want to trade all three, have your total risk on all three trades be only 2% of your capital or you will watch your capital drop very quickly.
While the system you set up to manage your capital is not as sexy as fine tuning you do to make your trading system a winning system, money management systems that make the biggest difference between winners and losers.
By: Susan Walker
