Money Management

There are Many rules of good money management

Take small percentage of Risk upon your total account

Why it is important?
The main idea of the whole trading process is to survive! Survival is the first idea to making  money.
One should clearly understand that good traders are, first of all, skillful survivors. The skills of surviving become a vital "must know" requirement to keep own Forex trading accounts "alive" and be able to make profits.
Let's to  look at the example that shows a difference between risking a small percentage of capital and risking a larger one. In the worst case scenario with ten losing trades in a row the trading account have to suffer this much:

Trades Account balance Risking 2% of total account per trade 1 Start — 5000 100 2 4900 98 3 4802 96 4 4706 94 5 4612 92 6 4520 90 7 4430 89 8 4341 87 9 4254 85 10 4169 — 17% of the account has been lost

Trades Account balance Risking 10% of a total account per trade 1 Start — 5000 500 2 4500 450 3 4050 405 4 3645 364 5 3281 328 6 2953 295 7 2658 265 8 2392 239 9 2153 215 10 1938 — over 60% of the account has been lost

We can see  there is a big difference between risking 2% and 10% of the account balance per trade. A trader who has made 10 trades risking only 2%, in bad time conditions would lose only 17% of his investment. The same trader who had been exposing 10% of the balance per trade would end up losing over 60% of his initial investment. So we can see that a money management is so need to manage in Forex Trading.

A practical example of applying money management rules:

Risking no more than 2-3% of the total account per trade... How does it work in practice?
Let's use an example to understand it.
We have opened a trading account of $1000 USD with a broker and got 20:1 leverage. So, now we have leveraged ourselves to $20 000 USD to begin trading with.
More money means a higher trading power. Correct. But, the higher the trading power, the higher the risks; and when we talk about risks we talk about a real account value which will decrease with every loss sustained during trading.
So, when we say risking no more than 2-3% of a total account value we mean the real account value — which is $1000 USD in our case.
Now, let's start trading and do the math.
Let's say, we have decided to risk 2% of the account in each trade.
$1000 x 2% = $20 USD.
This means that when the price goes against us, we will need to be out of the trade once we are $20 dollars down.
Ok, time to trade. Our trading power measures $20 000 USD (thanks to our leverage).
What will happen if we try to trade them all at once: for one $20 000 dollar trading lot order our Forex broker gives us a pip value of $2 dollars. This means that with each pip gained we will have +$2 USD in our pocket. But this also means that with each pip lost our real account will shrink by $2 dollars.
Since we can afford to lose only $20 dollars in one trade, we'll exiting a trade once the market makes... -10 pips! Yes, only 10 pips is required this time to reach our 2% limit.
10 pips * $2 USD per 1 pip = $20 dollars, which is our 2% account limit according with the money management rule we've chosen to follow.
Now, let's try to trade a $10 000 dollar position. The pip value for this position size will be $1 USD.
The math goes as follows:
we can stay in trade until market makes -20 pips against us. Yes, this time we can sustain a bigger market shift.
If we decrease our trading lot to $5000 USD, our sustainability will raise to -40 pips against our trade. (The pip value for $5000 dollar lot will be $0.50 cents).
And so on.
As you can see, with the money management rule in place our real account is under control. And even if leverage allows trading larger positions, the risks should be always under control.