When we look closely into any kind of trading, and with any type of market, you will notice that you can only do so much with how the market moves. The trends that you encounter will move up and down and you have no control over it. Whether it lasts long or not, in most cases what you can only do is to make the necessary predictions, estimates and how you should be reacting to these movements in the market. This is where trading money management becomes completely important.

So no matter what market you are trading in, one great strategy that you should have is a money management strategy. This is one method that many traders often fail to focus more on. It refers to having the right discipline when the trading calls for it. It is not just about the knowledge on how you should move within a market, but more on how you should be more prepared. It is knowing when is the best time for you to enter and exit the market.

If you want to become a success story in your trading activities, then you have to know and perform your own trading risk management. This is basically what trading money management is also about.

Risk management is the set of rules that you follow at a level of which you are most comfortable. There are four components to this:

1. Trading float

This is the money that you put aside whenever you are trading, basically you do not actually use this with your trading. This savings will help you to avoid losing huge amount of money.

2. Maximum loss

In any form of trading, and in any market, you must have already set aside the maximum amount that you are comfortable enough to lose. This is in case the market does not work much to your favor.

3. Initial stops

There is no shame in admitting defeat and exiting a trade, especially if you are not completely sure where the trend is going. So the best thing to do is to put an initial stop on your trading. This is a predefined point wherein you are ready to say you are going to lose in that trade and it is time to exit. This way you are limiting the amount of money that you could have otherwise lost.

4. Trade size

When you have set your initial stop, you need to calculate your position size so you will never have to lose more than your predefined maximum loss. The simple formula for this is:

maximum loss / initial stop size = number of units to purchase

You should always use this formula and you will not need to worry about making big losses next time that you trade.

To help you avoid making major trading losses, just stick to these four elements of a risk management or trading money management strategy. Whatever market you are in, this will help you take control more of your trading.

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Filed under: Currency Trading

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