This in one of the most important aspect in trading. To begin with, what is Forex money management rule? This simply means; managing your volume, stop losses and other factors or parameters properly in your trading system according to your account size. "Why is it so imperative?" you might ask.
Well the simple truth is that we are all in the Forex business to make money but it’s so unfortunate that many traders only thinks of profit making without considering the other aspect which is loss making. If you calculate the total percentage of losers in Forex trading and also trace their reason for failure in the business, you would realize that almost 70 percent of losers fail not only because of a non-profiting trading system but because they lack money management rule in Forex.
Such trader re always anxious to get into trading without considering their total account size. Traders with no money management rule are no difference to gamblers. They don’t look at the long term profit on their investment instead they look for that jackpot. Money management rule will not only protect your investment but will make you a profitable trader in the long run. Only if you learn to control your losses, you will have a chance at being profitable. Remember, the more you lose, the harder it is to make it back o your original account size.
For instance, you have a $1000 account size and you lose 50%, you would be left with $500.The question is, what percentage of the $500 do you have to make in order to get back to your original account size which was $1000? It’s not 50%, you would have to make back 100% of your $500 to get back to your initial account size ($1000). This is called draw down. For this example, you would have had a 50% draw-down.
The point of this illustration is that when trading with a high percentage of your equity, it is very easy to lose significant money and a lot harder to make it back. This is more of the reason why you should do everything you can to protect your investment. Therefore, risk only little percentage of your account in each trade.
I am not saying you should make pips that are valueless but all am saying is that you should always try to consider that profit made or that profit you are about to make as a loss then try to see or imagine the effect of the loss on your investment. If the loss doesn’t or wouldn't have too much effect on your investment then your money management rule is okay. But if the reverse is the case, it means you have to work on your money management rule according to your account size.
However, don't forget forex trading is meant to be an investment and not a get rich quick system. If you learn to manage your funds, then you could be a profitable trader, all you will need is a profitable trading system.