Money management is such a complicated area that few understand. Even fewer can handle the pressure while recognizing the importance of it.

To manage money means to manage risk. The risk of “what if” something other than what was planned will happen. And it will happen. It is not a question of if, but when and how to best prepare.

Hence, in Forex trading, if there is one thing to study and master, before anything else, is how to manage a trading account. Or, how to handle the risk in a trading account. Naturally, how to handle money!

There is so much written on the subject that is enough to drive the most ambitious traders away. Ego plays a crucial role here, as it is the worse enemy in the lifecycle of a Forex trader.

People tend to adopt an “I know better” attitude, or a “what can go wrong” one. Especially when beginners, traders ignore everything they hear about money management, as the terms and strategies are a bit “boring.”

After all, no pain no gain, and no risk, no profit. Right? Wrong.

The aim is not to lose, first. Then, to make some money.

Like it or not, from the moment a live trading account is funded, every retail trader is a money manager. That’s the definition: to manage the money in a trading account (portfolio) in a responsible manner.

Looking at the failure rate (over ninety percent of retail traders lose their first deposit), retail traders lack almost completely the money management skills needed to survive in the competitive Forex trading industry.

As such, this article aims to be a cornerstone of what advanced money management is and what are the pillars of it.

We’ll present here what is needed for advanced money management of a trading account, the techniques required and how to make sure the account is protected against common threats.

And then, in the following three articles of this trading academy, we’ll cover in detail the three pillars of advanced money management: hedging, diversification, and proper planning.

Components of Forex Trading Money Management

Many associate Forex trading with gambling. After all, consider the casino: all you must pick is a color out of two and sometimes a number, and you’ll win or lose. What are the chances for it to happen?

The same in Forex trading. All traders need to know is the direction of the market: up or down, to trade long and short. What are the chances for that?

The problem with this comparison comes from the chances involved. And, how traders, as money managers, control those chances.

In Forex trading, we can compare economies. Comparing the two economies shows which one is stronger and which one is weaker. Moreover, it shows the economic potential ahead.

As most currencies on the Forex trading dashboard are free-floating, they represent the strength of their economies. Hence, it is unlikely that a currency will not correlate with the economic strength.

The EURUSD chart above is the perfect example. When the Eurozone crisis ignited, with the Greek and Cyprus economic troubles, the vicious circle quickly spread over the entire European continent.

GDP (Gross Domestic Product) stalled or dipped, unemployment rose, and overall economic conditions fell to unbearable lows for many Europeans.

In the United States of America, the situation already started to improve. Because of the proactive nature of the measures taken by the Federal Reserve of the United States, the economy picked up, and a lag between the two was evident by merely comparing the economic releases.

It is no wonder that the EURUSD fell from 1.40 to almost parity, taking a nosedive into the abyss. For more than two years than the pair consolidated due to significant political and geopolitical events due: the Brexit vote in the United Kingdom (the U.K. held a referendum and chose to leave the European Union) and the U.S. Presidential elections a few months later.

During this time, the Eurozone economies improved sharply, with a real-GDP growth outperforming the one in the United States. Hence, the EURUSD pair recovered to values above 1.20.

The moral here is that economic analysis increases the chances of forecasting a currency pair’s move. Hence, Forex trading is by no means gambling.

If, on top of fundamental analysis like the example above, traders add technical and money management skills, losing in Forex trading won’t happen that often.

Throughout this trading academy, we’ve covered many technical analysis strategies and concepts. And, we still have some more left.

But every technical or fundamental analysis setup isn’t complete and won’t bring results if not accompanied by sound money management principles.

Hedging a Trading Account

Hedging refers to covering the chances of losing. In Forex trading, it has a dual meaning in the sense that sometimes traders identify opportunities on both sides of the market: long and short. And, on the same currency pair.

As such, hedging a portfolio or a trading account refers to taking different trades on the same market.

There are multiple types of hedging, and we’ll cover all possible strategies in the upcoming article.

Diversification – A Mean to Protect Capital

Diversifying an account is an art. There is a fine line showing how much is too much when it comes to diversification. Or, how much to diversify before over diversification affects the growth of an account.

Proper Planning – Key to Money Management

Planning is key to everything. Businesses plan their quarterly and annual budget, and even governments do that too. Wouldn’t this help in Forex trading also? It certainly does.

Planning involves both technical and fundamental aspects. Placing pending orders, for example, reveals a plan price action to come.

Ahead of any trading week, planning involves considering the upcoming risk events and picking up the currency/currency pairs to focus on. For example, in a U.S. Dollar driven week, it may be wise to diversify the trading account by focusing on trading crosses or scalping for short to very-short-term profits.

Conclusion

Money management is key to a trading account. Unfortunately, as humans, we’re full of flaws.

We have impulsive characteristics, lack patience, and want to succeed as quick and fast as possible. And, if not asking too much, with little or no effort.

Let me tell you from the start, that is impossible. Not only in Forex trading but in all aspects of life.

Treating trading as a hobby is not the right approach. The account needs a disciplined approach, and one of the first things to do is to educate yourself before jumping into buying and selling currencies on the most competitive market of them all.

Money management is a field that deals mostly with traders’ psychology. Everything you’ll read about it will resonate one way with you and your personality and another way with a different person.

Some people are risk-adverse, and they don’t conceive entering a trade unless “all-stars” are aligned, and all indicators point to the same direction. Others don’t use a stop loss as they trade on “the bigger picture.”

The truth is that there’s no universal recipe to fit all personalities. And, perhaps, this is what attracts people to markets: there is no one way to make it, but a general way to help you achieve success in Forex trading.