Money Management What sets successful traders apart from those who fail over the long term is their money management skills. Money management can be thought of as the administrative side of trading. The basic aim is to manage risk by limiting market exposure, at any given time, to acceptable levels. This is achieved by managing factors such as statistical arbitrage pairs trading forex amount of capital risked per trade and the total number of open positions.
Forex trading makes this task particularly challenging. Firstly, many forex traders use high leverage. Secondly, the forex market uses fixed-sized trading contracts known as lots. With a smaller account, this makes the choice of trade size even more critical since each unit can represent a relatively large proportion of the account capital.
Risk Per Trade The first principle of money management involves deciding how much of your total capital to expose at any given time. If you choose too small a value, your account will be underutilized. Too large a value and you risk a margin call. So what’s the best way to go? The advantage of using a formulaic approach is that it will tell you precisely how many lots to trade at any given point. In doing so it takes into consideration the account balance, lot size and the maximum loss allowed per trade.
As your balance changes through profits or losses, your exposure is increased or reduced in the same proportion. The Excel spreadsheet that can be downloaded below will calculate the sizes and maximum lots using fractional money management. One thing the above doesn’t do is factor for correlation between positions being held. Advantages of smaller lot sizes When it comes to money management, flexibility is the key. Having an account that’s able to trade in smaller lots has several major advantages.