Introduction

Did you know that you can lose large sums of money trading Forex, even if you have a profitable Forex trading system? Contrary to what most Forex traders believe, a profitable Forex trading system is not the be all and end all to successful Forex trading. The secret to keeping your trading account safe and growing your profits exponentially at the same time is the little-known practice of Forex trading money management.

What is Forex Trading Money Management?

Money management in Forex trading is basically how much you should risk on each trade, and there are many different money management strategies. A popular example that you will hear about often is the 2% rule, which states that you should not risk more than 2% of your trading capital on a single trade. Most people get confused by this definition because they confuse margin with risk per trade, so I’ll explain it another way: If you’re using the 2% rule, you should size your positions in such a way that you don’t lose more than 2% of your capital in a specific operation. For example, if your stop is 10 pips away and 2% of your equity is $200, then you should only take 2 contracts (2 contracts x $10 per pip x 10 pips = $200 risk per trade).

The Limitations of Traditional Forex Trading Money Management

Most people religiously follow the 2% rule without knowing why they should. Personally, I believe in knowing why I’m doing something before I do it, so I researched this thoroughly. It turns out that if you want to minimize the risk of ruining your trading account while maximizing your trading profits in the long run, you’ll want to keep your risk per trade between 2-4% of your trading capital. Depending on your own risk tolerance, you can actually go as high as 3% or even 4% to further increase your profits, without increasing your risks much.

The Secret Method of Exponential Money Management

The 2-4% Forex money management model is a type of geometric money management technique and is the most efficient way to grow your capital when trading Forex. Traditionally, people apply money management in forex trading using fixed contract sizes, which is good for small accounts but not very efficient. The reason the 2-4% rule is so powerful is because it allows you to apply the power of compounding to your trading. As you make profits, you reinvest them over and over again, creating an exponential growth rate in your trading account. I’m sure you’ll agree that when it comes to your trading profits, an exponential increase is much better than a linear increase.

The power of the 2-4% rule

There are two ways to apply the 2-4% rule. One is to update your position size at the end of regular time intervals, and the other is to update your position size at specific profit/loss milestones. Regardless of which method you apply, it is clear that the 2-4% rule is powerful because it creates the fastest and safest growth of your trading account. Obviously, you will need a profitable Forex trading system to successfully apply this Forex trading money management strategy. Once you have these two components in place, there really is nothing stopping you from creating a consistent Forex passive income that grows and grows over time!