Introduction
Did you know that profitable Forex trading doesn’t guarantee your profits won’t be lost? Surprisingly, a profitable Forex trading system is not enough to keep your trading account safe and make your returns grow. The secret tool to fuel these benefits is the less known process of Forex trading money management.
What is Forex Trading Money Management?
Forex trading money management is how much you must risk per trade. There are many money management strategies that exist, but most Forex traders follow the 2% rule. This rule suggests you should not risk more than 2% of your trading capital on any given trade. Most people confuse margin with risk per trade, but to put it simply, using the 2% rule involves setting your position sizes to guarantee that you will not lose more than 2% of your capital in any trade. For instance, if you are willing to risk $200 and your stop is 10 pips away, then you should get 2 contracts (2 Contracts x $10 per pip x 10 pips = $200 risk per trade).
The Limitations of Traditional Forex Trading Money Management
Most traders follow the 2% rule without knowing why it works. If you want to minimize the risks of losing your trading account but maximize your profits in the long run, then you should limit the risk per trade to between 2-4% of your trading capital. You can even go up to 3% or 4% to increase your profits even further, depending on your risk tolerance levels.
The Secret Exponential Money Management Method
The 2-4% Forex trading money management is a geometric money management technique, which is an efficient way of growing your capital when trading Forex. The traditional method of applying Forex trading management with fixed contract sizes is good for small accounts but not a very effective method for long-term growth. The 2-4% rule is very powerful because it allows you to compound your profits repeatedly, thus creating an exponential growth rate in your trading account. An exponential increase is always preferred over a linear increase when it comes to your trading profits.
The Power of the 2-4% Rule
The 2-4% rule may be applied by updating your position sizes at the end of regular intervals or through specific profit/loss milestones. Regardless of the method used, it’s clear that the 2-4% rule is the fastest and safest way to grow your trading account. However, you still need a profitable Forex trading system to apply this Forex trading money management strategy successfully. Once these two components are in place, you can create a consistent Forex passive income that grows over time.