I would like to show you how to develop a good money management discipline in Forex trading without risking more than 0.5% of your trading capital on a single trade.

Let’s say you intend to use USD$5,000 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 USD$5,000. So my humble recommendation is for you to open a mini account with per pip cost at 1 dollar.

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

Once you know that you 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 USD$500, 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. So using this money management, you are actually risking only 0.5% of your trading capital on a single trade.

In all, a good forex 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 entry was posted on Thursday, October 9th, 2008 at 2:45 am and is filed under Currency, Forex, Forex Income, Forex Info, Forex News, Trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.