| A trader with a mediocre system and great money | | | | since your capital is tied up in the first one. |
| management skills will fare better than a trader who | | | | Set Your Stop Placement |
| has a great system but no handle on his money. | | | | The amount of money you place on a trade is a vital |
| Money management is indispensable to the Foreign | | | | factor, too. If you put too many of your eggs into |
| Exchange trader. | | | | one basket, you will decrease your ability to diversify |
| Regardless of how strong a trading system you | | | | properly. In order to choose your lot size, you must |
| have, if you do not apply good money management | | | | identify your maximum allowable risk and your |
| controls, you will find yourself in trouble. | | | | maximum risk per trade. Once you have determined |
| Dustin Pass, one of the foremost experts on Forex | | | | these factors, you will need to set your stop |
| trading says, "An individual trading with proper money | | | | placement. |
| management skills will do better in a mediocre trading | | | | Stop placement is the act of predefining your level of |
| system than a person trading an excellent system | | | | loss tolerance on a given trade. The successful Forex |
| who lacks money management skills." In his ebook, | | | | trader will learn to cut his losses and move on. In the |
| Guide to Forex Live-on-the-News Trading, Pass lists | | | | overall scheme, it will save you money…and |
| five essential components to an effective money | | | | increase your gains. |
| management program: | | | | Entry Levels |
| 1. Currency selection | | | | Entry level is based on all of the above. Knowing how |
| 2. Lot size (how much margin will you use) | | | | much you have to play with on a trade and where |
| 3. Stop placement (how much margin will you risk) | | | | the nearest resistance level lies will inform you |
| 4. Entry level (when to enter a trade) | | | | whether to enter or pass on a given trade. Often, |
| 5. Limit (how much money will you make) | | | | the best trades are the ones you didn't make! |
| Currency Selection | | | | Allocation |
| Currency selection is important because it dictates | | | | One simple principal must guide your limit level: the |
| how long your margin will be tied up in a particular | | | | possible profit must at least be equal to the |
| trade. If you enter a trade on a slow moving | | | | accepted risk. Allocation is key. Suppose your system |
| currency, understand that your money will be tied up | | | | is 75% accurate and you lose on the first 25 trades |
| for a longer period, thereby increasing your risk. You | | | | out of 100 total trades? You will need enough margin |
| may also hinder your ability to enter another trade | | | | to hang in there for the next 75 trades. |