Crucial Money Management Guidelines

Money is the opposite of the weather. Nobody talks about it, but everybody does something about it" - Rebecca Johnson"Managing money requires more skill than making it."
The last phrase indicates the importance of money management in trading and this is the key skill for traders, if they intend to earn large profits from the Forex market.
Money Management is the fundamental element of successful trading. It is the process of planning, organizing, and controlling money related matters in a Forex trading 'strategy,' in which money management plays a crucial role in helping traders to establish a trading plan, work out their trading capital and make investments in accordance to their risk bearing capacity. Money management also helps in determining the ideal risk exposure for individuals.
--- advertisment ---
Generally, money management is related to the allocation of funds, more specifically; diversification and portfolio management. This is the most important aspect of trading that every trader must know, to preserve capital and make gains.
Risk is something that nobody wants to see in their portfolio, but unfortunately it is present in every financial portfolio or a trading decision. To minimize or hedge the risks; money management is very vital.
How does it relate to Forex trading?
There is a popular quote in trading that goes like; "Never trade with money which you cannot afford to lose." This quote is absolutely applicable here; novice traders must follow this rule by not trading in markets unnecessarily (or overtrading), without any clear direction or strategy. The importance of money management can be summarized as follows:-
1. Important in forming trading strategies - Money management is very useful in making trading strategies. A trading system with proper money management can provide mammoth returns to traders in the long term. 2. Helpful in managing risk - Managing risk is not difficult but it is nonetheless critical. Diversification and trading rules can be implemented to manage risk and reduce the downsides that are associated with a trade. For example, according to expert traders; averaging does not make sense in a falling market but it is good when the market goes up. Hence, when the market falls, they exit from long positions by taking a tight stop loss. On the other hand, if the market moves in their favor, they start adding new positions on every upward move.3. Helps in defensive trading - For a beginner, money management is very helpful in defensive trading. Novice traders can use trading objectives, limits and strategies to remain within a moderate zone, without going overboard with aggressive and risky trades, while they still make good returns.
Key Takeaways
Based on the principles of money management, traders can stop trading if their portfolio or individual pair goes below a particular percentage of stop loss. The main motive behind money management is to place a limit on the likelihood and extent of losses. With the help of money management, traders can increase the number of winning positions and reduce losing positions, while balancing their investments with their risk.