Why we need money management in Forex?

The simplest answer to the question asked would be to limit our losses and to win profit from forex trading. If a trader is presented with even the best set-up with considerably good trading guidance, in all probability, he or she will end up losing money. But if you present them a good money management tools, the situation will be entirely reversed.

At the beginning, it may seem quite burdensome and unpleasant to take up the challenges. You have to constantly monitor your positions. You will also have to take necessary losses. Because, earning 100% profit in forex trading is extremely difficult and attained by less than 1% traders. With a 75% drawdown, you will have to quadruple your account, which is not an easy task.

Some simple runaway losses occur simply because of sloppy money management practices without proper stops or many average downs in the longs and average ups into the shorts. You must remember that Forex trading is not always about Big Win but Big Loss that can knock you out of the trade forever.

A most practical approach would be not to risk more than 1% of total equity on any trade. If you go wrong 25 times in a row, you still have 75% of your equity left. You should also use only your speculative capital if you are just starting forex trading. You should place an amount in trading that will not impact your life if you lose it entirely. This amount you should divide into 4 to 5 equal parts and then start with one part.

Depending on your grit, take one of these two approaches while trading forex. Either take many frequent small stops and gather profits from the few large winning trades, or take many small gains with infrequent large stops. Depending on this decision your trading strategy has to be formulated too.