Forex Trading: Money Management :

On the foreign exchange market, it is often said that a good money management system is necessary for long-term profits and profits. In other words, good management of its investment capital. Let's look at it in more detail in this article.

If taking care of one's capital is obvious to most seasoned traders, many beginners miss out on this fundamental notion for lack of experience. Focusing on their graphic analyzes, they forget to set up an effective money management system or it is a vital element to earn money on the international currency market.

Manage your capital

First, money management is based on managing its capital. Concretely, this means determining how much money you will be allocating to each position. This is a notion closely linked to another notion inherent in money management, risk management, ie the risk that one takes on each past position.

Manage your risks

Forex risk management involves two new concepts: the drawdown, which represents the maximum loss recorded on a series of trades, and the reconversion that corresponds to the performance required to clear the drawdown.
In terms of percentage, a drawdown of 10% will require a conversion of 11.1%, for 15% it will be 17.6%, for 20% it will be 25%, for 25% it will be 33.3% and For 50% it will be 100%.
As you can see, if you suffer a 25% loss, you will have to make 33.3% to return to the initial capital, a considerable effort.
In order to avoid the phases of excessive losses, it is absolutely necessary to manage its risk by position. Indeed, if you take 5% risk per trade and negotiate ten times a day, you expose yourself to a huge potential drawdown. Generally, it is advisable not to exceed 3% risk per position.