Anyone serious enough about trading would do well to incorporate money management techniques to their trading plan to protect their portfolio.
Nearly all successful traders use a money management strategy along with their regular trading plan, and if you have ever experienced a severe drawdown on your account, you probably do too.
Basically, having safeguards in place to protect your account to remain in business is far better than the alternative. What follows are some general guidelines for money management, which can be incorporated into a trading plan.
Tip #1: Only Trade With Risk Capital
Trading currencies involves taking substantial risks, no matter how you look at it. Because of the free-floating currency market, currency trading has considerably more in common to gambling than investing.
As a result, putting funds at risk which you cannot afford to lose should never even be considered by a responsible forex trader. This includes money needed for key housing expenses such as your mortgage or rent payment, or the weekly food allowance necessary for your or your family's sustenance.
In general, traders do better by only trading forex with funds known as risk capital. Such money has been specifically designated for trading because it is expendable and therefore not needed for the basic essentials of living.
Tip #2: Cut Losses Short, Let Profits Run On
These just have to be some of the most popular words of wisdom that Wall Street has ever passed on to its novice traders.
The basic idea behind this saying is that you should first endeavor to manage your risk by using stop losses in a disciplined way.
Secondly, you should also allow your profits to accumulate when you have a winning position. Traders often use trading stops for this purpose.
Furthermore, as a wise trader once said, "In trading, it's not what you make, profits take care of themselves; it's what you don't lose that really matters."
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