Money Management is One of the Cornerstones to Trading Success

It is important to remember that the aim of trading forex is to make money. Therefore irrespective of how good your currency trading strategies are, if you don't apply any money management principles, you are not going to succeed in the long term.

The way you manage your money will affect your level of trading risk. For example, if a trader puts all of their money in one trade, this would make the entire trade extremely high risk because the trader is totally dependent on its income.
Don't make large trades using all or a large portion of your available capital, otherwise you will find that you have lost everything after a couple of bad trades. Good forex traders with effective money management can live through several bad trades without losing all of their capital.
The concept of money management may not sound nice because it requires the ability to accept losses when the market goes against you. Losses will occur in your trading they are inevitable. It is important to learn how to manage your losses, which can be controlled through the use of stop losses.

 The way that you determine your money management rules will depend on your risk profile, trading capital and financial goals, It's up to you to determine how much you are willing to risk. Many traders risk between 1% and 2% of their trading capital in any one trade.

There are various money management techniques that traders can employ to allocate and protect their trading capital. A simple and common money management method that is widely used is explained as follows:
1. Determine the total amount of trading capital you have available to use. For example, lets say you have $25,000.
2. Determine what percentage of your trading capital you are willing to lose on any one trade. For example if you are willing to lose 2% of your trading capital then 2% of $25,000 is $500 meaning you will limit your loss to $500 for any one trade.
3. Determine where you will set your stop loss price, this is the amount of pips between your entry point and stop loss point, say for example you choose to set a stop loss at 25 pips away, then you must exit your trade and take your losses if the market goes against you by 25 pips. For a regular sized contract of $100,000, each pip is worth about $10. Therefore a stop loss of 25 pips means a stop loss of about $250
4. Determine how many contracts you will purchase. As from step 2 above you are willing to risk $500  and from step 3 you will exit at loss of $250, therefore dividing $500 by $250 equals 2, meaning you can purchase 2 contracts:
  - with a standard account and with 100:1 leverage, 2 contracts will require $2,000 of margin deposit.

 A good money management principle is never to leverage more than 1/5th of your trading capital at any one time. For example, with $25,000 of trading capital, you should never use more than $5000 as a margin deposit at any one time, which is about 5 regular sized contracts.

Another important concept of forex money management is the application of the risk/reward ratio. It measures how much you are willing to risk compared to how much profit you want to make. For example, if you have a risk reward ratio of 1:3 and you set a stop loss at 25 pips away, you will exit a winning trade when you make 75 pips. Generally a risk/reward ratio that is 1:2 or greater is necessary.

It is important to continually exercise discipline when trading forex. Good traders have taken the time and energy to build up their skills and confidence in the market. A successful forex trader always adheres to their money management rules. Consistent application of effective money management is crucial to surviving in the long term.