Money management and trading psychology

What is money management on Forex? What are the rules of money management in trading? How does the psychology of trading and money management on trading results. You will find the answers to these questions in this article.

Welcome, friends! While using the same Forex strategy , some traders lose and others earn money. Why it happens? The fact is that professional traders perceive trading on the stock exchange as work, and not as a game in a casino. Discipline in trading is the key to achieving success in Forex. To achieve this, you need to take control of your emotions and follow the rules of money management. The art of money management (risk) in Forex will be discussed in our today's article.

See also our independent Forex brokers rating with real feedback from traders.

Forex Trading Psychology

Novice traders treat Forex trading as entertainment and easy money, but for a long time they don’t linger here. Having received a random, quick profit, they end up losing it, and their initial investments, and then forever withdraw from trading. No wonder they say that no more than 10% of traders earn on Forex. Because Forex is, first of all, hard work on yourself, your strategy and risk management. Trading on Forex due to the high size of leverage is considered not only the most profitable, but also risky way to make money. Therefore, without complying with the basic rules of money management, the trader is doomed to failure.

If you compare trading on Forex with playing roulette, then betting on black or red, the chance of winning is a little less than 50%. If you bet on a specific number, the probability decreases accordingly. During the Forex trading, a trader can independently regulate the expectation of profit. For this, it is necessary to achieve an optimal ratio of risk and profit This can be achieved only if there is a strategy, a trading plan and compliance with the rules of money management in Forex, as well as minimizing the impact on the outcome of the transaction of the two main problems of the trader: fear and greed. Fear forces you to close a position when the first loss occurs. Greed leads to closing a profitable deal ahead of time, preventing you from taking the maximum possible profit. If you want to succeed in Forex, you must take control of your emotions and act strictly in accordance with your trading plan.

The psychology of trading is that the minimum losses in the market are perceived more easily and do not knock out the trader. Therefore, it is important that the possible losses from a single transaction do not exceed 2-3% of your deposit, and the expected profit is at least twice the size of the stop loss. You should understand that no trading system can be without drawdowns, but if you do not overestimate the risks, even a few losing trades in a row will not lead to significant losses and will be covered by profits in the future.

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Basic rules of money management in trading

At first glance, the rules of money management seem simple and banal, but not all follow them, hence the sad statistics of traders who have lost their capital. Write out these rules on a piece of paper and put it in a prominent place, let them remind you always of how to trade, and then you will never lose your investments.

  1. Never trade money that you cannot afford to lose. Even if you find a trading strategy that you are absolutely sure you don’t want to take out a loan, sell an apartment, or trade for money. Trading is a very risky tool for profit. Success will come to you only if you are mentally prepared for possible losses;
  2. Always use stop loss. Before opening a trade, you must calculate the possible losses in order to decide whether to enter the trade and how much. Trading without stops is a game of roulette, which sooner or later will lead you to collapse;
  3. Never risk more than 2% of the deposit in a single transaction. Breakeven Forex trading is a myth. No strategy is complete without loss. It is important that these losses are under your control. If you trade with minimal risk, your deposit must withstand any drawdowns, and future profits will override previous losses;
  4. The take profit size should be at least 2-3 times the stop loss. With this approach, you can quickly recover the previously received losses and get a plus;
  5. You need to know exactly when to open a deal and when to close it. That is, you must have a trading plan and always stick to it. Forex trading should be systematic with making quick, but accurate and thoughtful decisions.

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To minimize trading risks, you must have a strategy that is confirmed by testing on history and trading practice on demo accounts. But do not forget about non-trading risks, which include the effect of price slippings during the news release, trading terminal failure, broker bankruptcy, etc. That is why it is so important to choose a reliable and proven broker company. The combination of the psychology of trading with simple rules of money management at Forex significantly increases the percentage of profitability of the strategy and reduces the risks. Even the most profitable strategy can fail in the future without money management. At the same time, thanks to simple money management rules, a losing strategy can be made profitable and raised to a new level of trading.

Read also the article “How much to start trading on Forex?” .