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Importance of a Forex Money Management Plan
Date Added: August 04, 2008 06:12:18 PM


Fores tradingMost forex traders spend 70% and more of their time trying to come up with the latest, greatest forex trading system that man has ever seen.

That is a great thing, after all who does not wish to be responsible for creating a forex system that is always right, even when the market is trending, choppy or just dead ? The human being has a need to be perfect even when wrong. We all forget that being wrong is a great way to learn and improve ourselves. The perfect forex trading system has yet to be created and that is why forex traders need to come up with a forex money management plan that will allow them to make money even when they are wrong most of the time.

Every business has cash flow problems and that is why financial analysts are some of the highest paid professionals in the world. One needs to know when and how to utilize funds that are in short supply. Any business needs to know when to borrow, how much to borrow, when to spend and how much to spend depending on the underlying circumstances in the economy, with competitors and even within their own organization. A good forex money management plan will allow you to do the following.

1. Forex Money Management Plans Allow You To Preserve Trading Capital

Preserving capital is the most important thing that a forex trader should learn. Trading capital is hard to come by and trading without a good money management plan is a sure way to lose in forex trading. Setting up a highly leveraged forex trade in the hope that you are about to make a killing in the forex market, is the same as taking a mortgage that you can not afford. A good money management plan allows you to know how much to risk on a particular trade without the undue risk of losing all your trading capital.

2.Forex Money Management Plans Prepare You for The Worst

A period where you are losing money trading forex is inevitable. There are various reasons why you could lose money trading forex including having a trending market when your system is a scalping system or even the trader just having personal issues that interfere with his trading. The currency market has been known to change direction in a hurry if there is any shocking world news and a good money management plan will allow you to make it with your trading capital still intact during these uncertain periods.

Keeping your loses small compared to your wins is essential for your long term survival. A forex trader who has a habit of losing 100 pips but making 20 pips every time he wins is playing against the odds and is sure to lose his trading capital in the long run. A good money management plan will allow the trader to keep his loses smaller than his wins and thus continue making profits even when the market is against his method of trading.

3. A Forex Money Management Plan Helps You Set Reasonable Trading Goals

It is not true that you have a higher chance of becoming a millionaire trading forex than growing tomatoes. Without a good money management plan, the opposite might actually be true. With a solid money management plan, you are able to be realistic with the chances of your success and ignore the hype in the forex market. You are likely to keep yourself from gambling your hard earned trading capital by setting up predetermined maximum loses and concrete cutoff points in your trading. Every time you keep yourself from blowing your forex account is a good trading day and an opportunity to make more money in the long run.

Any forex trading system that is sold to you without a good money management plan is lacking something. Forex trading is not only about entering a trade when one moving average has crossed another but also involves learning how to properly utilize your available funds to take advantage of periods when your trading system is working well and cushion you in periods when your trading system might be failing. A good forex trader has a good forex money management plan.


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