Trading is all about risk and money management. First learn how to manage your risk and only then think about profits. Many new traders make the mistake of ignoring money management in the beginning but when they get their fingers burnt, they realize the importance of a good money management system. You don’t need to risk all your money on a single trade that you may or may not win. This is permissible in gambling but not in trading. In trading, you learn to survive by placing only a small percentage of your money at risk that is appropriate with the volatility level in the market on a single trade.

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Fixed Fractional System

Fixed Fractional Money Management System is the most basic and the most widely used among the traders. Under this money management system, you limit your risk to a fixed percentage of your trading account. Usually this fixed percentage is between 2%-10%. For more riskier trading strategy, you don’t risk more than 2% of your trading account on a single trade and for less riskier trading strategy, you may risk as high as 10% of your trading account. As a rule of thumb, don’t risk more than 2% of your trading account on a single trade as long as you don’t develop more trading experience.

Martingale

Now, a money management system that had its origins in gambling and betting but is used by many traders is the Martingale Money Management System. Many traders love to use this system when they start losing. There are many trading systems that use the martingale strategy to recover from a loss. There are a number of forex robots or what you call expert advisors that use this strategy to recover loss. What is this strategy then? Suppose you are trading with $2,000. If you make a winning trade, good enough, you again trade with $2,000. But suppose you lose. In this case, you double your amount to $4,000. Suppose, you win, you will recover the loss on the first trade. But suppose, you lose again. So, you double this amount again to $8,000. You keep on doubling until you hit a winner. Pretty risky, huh!

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