One of the chief components of any Forex trading strategy is money management. Any good Forex trader will tell you that money management is more important than anything else as far as your trading strategy is concerned. If you have mastered money management and you know how to control the flow of money inwards and outwards, then irrespective of how strong your trading strategy is, you are bound to do well.
Money management in Forex trading is a skill that takes time to get acquired and for many traders, it is something that they still struggle to master even after several years in this Forex trading industry.
Money management can be defined in various ways using various parameters. It can be defined in terms of risk and returns, it can be defined in terms of lot size and leverage and it can also be explained in terms of the balance. But overall, it is all about adjusting the lot size and the leverage in such a way that you have it exactly match the risk and the returns and the success percentage of your system. If your Forex trading system has a success percentage of say 80% (very few systems have such a high percentage of success on a consistent basis), then it basically means that you can risk more knowing that 4 out of 5 trades will always be right.
It also means that your risk to reward ratio (ratio of SL to TP) can be less than 1 and still you will continue to make money trading Forex. On the other hand, if your Forex trading system has a success ratio of 40-50% only, then it means that you have to risk lesser per trade and it is necessary that your RR ratio is greater than 1 every time so that you can make money.
All this makes it abundantly clear that money management is a combination of all these aspects in the right proportion and it is actually much more complicated than anyone would like you to believe. If it’s so complicated, then why bother to learn/master it? It’s because if you master money management, you have moved 80% towards achieving trading success. It might sound cocky but it’s true.
What has been defined above is all theory. It gives you a glimpse of the theory that is behind money management. But it is very difficult to associate numbers to any of the parameters described above. Some Singapore Forex traders will say that your RR ratio has to be 2:1 or 3:1 always while some people say that they succeeded with just 1:1. Some traders will say that the success percentage of the trading system has to be at least 70% while many traders are successful even with a percentage of 40%.
Some traders will say that you need to risk only 0.25% or 0.5% of your balance on every trade while there are many out there who risk 2-3% per trade and still make money. So, money management in Forex trading in Singapore is a complicated technique which is actually a sum of all parameters in perfect balance. Only if it is in perfect balance, will your overall strategy be good?
You need to spend a large part of your learning time in understanding how to achieve this balance. The time you spend on it will be well worth it in the long run.