Forex money management strategies are the most basic, yet most critically important to get right because ultimately your long-term success as a trader relies not on how often you win, but rather how much you win when you are right verses how much you lose when you are wrong. In fact, that is the motto of one of the most successful forex traders in history, George Soros.
Even traders with a high forex probability expectation, or in other words a high win rate of say 70-80% can still lose money over all, if their forex losers are significantly larger than their winners.Forex traders who have stood the test of time and have become successful have at some point come to grips with the reality that losing is a part of trading and there are times when your forex losers are consecutive.
This is why using a forex stop loss and having a conservative forex stop loss strategy is so important.In addition to this it is also vitally important that you only risk a small percentage of your overall capital at any one time. 5% capital allocation is not too aggressive, nor conservative in terms of real risk and on a $5000 trading account means the maximum amount of capital risked at any point in time is just $250.
The next thing to consider when analysing trading opportunities is the forex risk reward ratio. A basic and commonly used benchmark in currency trading is a 1:2 forex risk reward ratio. The goal here is to win $2 for every $1 lost or in terms of pips to have a forex profit target or win of at least 200 pips for every 100 pips lost, while still only placing 5% of your total risk capital in the market at any one point in time.
This conservative approach to forex money management will give you a significant window of opportunity and (hopefully) allow you stay in the forex trading game long enough to become consistently profitable, even when faced with a string of losses, which under more aggressive strategies may well blow up your trading account!