Money Management Is the Critical Part of Forex Trading

Money management is one of the most important problems of new and even advanced forex traders. Almost everybody can find a good trading system that can be profitable but something that causes traders to lose and be negative at the end of the month, is lack of a proper money management strategy and discipline. Although money management is so important and critical, it is still very easy to follow.
Money management have several different aspects and stages and should be started from the very first stages of your live forex trading business which is opening your live trading account. We have a very simple rule that says “Never risk more than 2% of your money.” Most traders think that this rule should only be applied after having a live trading account and while they trade, but this is not true. This rule should be considered even when you want to open your live account. Lets say you have already practiced and demo traded enough and you feel confident enough to open your live account. And lets say you have a $20,000 saving. Would you open a $20,000 live account? Well, you can do that but what if you lose this money for any reason? For example your broker becomes bankrupt and closes the company and never pays your money back. Or you take a 20 lots position by mistake and you forget to set the stop loss. It goes against you for 100 pips and wipes out your account. You will not be able to start over, at least for a long time that you save some money. And this initial failure may have a bad impact on you and you may not think about forex trading anymore and you will lose the opportunity for good.
If $20,000 is the only money you have, you should open a $400 account, specially if that account will be your first live account. Or a $1000 account maximum, if you are confident enough that you have had enough practice and you know how to trade.The second stage is when you want to choose the leverage of your account. Nowadays you can have even a 1:500 leverage but this leverage is too big for new traders and even experienced traders try to avoid it. A 1:200 leverage is acceptable. I do not want to talk about leverage in this article because this article has to be focused on money management but briefly, leverage is the facility that your broker gives you to enable you to manage bigger amount of money using a smaller amount of money. For example if a broker gives you a 1:1 leverage account, then when you want to buy 100,000 USD against Japanese Yen, you should have 100,000 USD in your account at least. But if a broker offers a 1:100 leverage, then you only need to have $1,000 to buy a 100,000 USD and so with a leverage of 1:500 you only need to have $200 to buy 100,000 USD.