How to Develop Good Money Management in Forex Trading

In this article I will show you how to develop a good money management discipline in Forex trading without risking more than 5% per trade.

Let's say you intend to use 5,000 dollars as your starting capital to trade the Forex market. (Before I proceed further, what do you think with that amount of money, should you open a mini or a standard account?) Although per pip for a standard lot cost 10 dollars if you were to trade GBPUSD currency pair, but that doesn't mean that you can open a standard account with 5,000 dollars. So my recommendation is to open a mini account with per pip cost at 1 dollar.

Before deciding how much you want to risk per trade, you should start with how much you are willing to lose per month, so to withstand any possible drawdown. Since we are starting with only 5,000 dollars as capital, I would suggest a maximum cap as high as 10% risk per month, which is 500 dollars. So now we know that we can only trade with 500 dollars a month* even though we have 5,000 as capital. The next step is to determine your risk per trade.

Once we know that we can only risk 500 dollars in a month, and then you can decide how much you prefer to risk per trade. To simplify calculation, let's say we decide to set the risk per trade at 5% of 500 dollars, so that means in a mini account, 25 dollars is equivalent to 25 pips. Once you have decided that this would be your money management, the next is to look out for trade setup not risking more than 25 pips, and only if both conditions agree, then you enter the trade.

In all, a trader should possess three important elements in order to trade profitably. That is you need to adopt a disciplined mindset, developed a proper money management and together with a good trading system, you should be able to trade with confidence and see your trading account grow.

*This money management means that in order to wipe out the trading account, you have to lose ten consecutive months of trading to burn that entire 5,000 dollars. Is that possible? Yes, if you don't have a profitable trading system. If you have a profitable trading system (you may want to consider using my trading system), it is very unlikely that you have such a disastrous run.

Wilson Neo is a private currency trader and regular contributor to the website http://www.fxoperator.com

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