Money management

Money management is the most important aspect in trading forex and commodities especially in times of volatility in the currency markets.It not only helps us safe guard our accounts from totally being wiped out but it allows us the comfort of having an emotional free trading environment where after placing a good trade, you can relax and let the market play itself out. We at one time or another have come to realize that we have absolutely no control over the market and sitting in front of the monitors watching every tick,every pip pass by brings in the ugly aspect of emotional trading making rush decisions that we later regret and kick ourselves.We have all been through this stage at one time or another but learning from our mistakes is key in this business.

To avoid all these,we need to plan our trades even before we make an entry in our trading platform.We must decide what is our risk reward ratio,where will we place our stop losses and what amount of money are we going to risk at any one time. Most traders recommend a 2% risk per trade since it will take you a win of  2% of your account to recover any lost trades and bring your account back to were it was.If you trade with a 3% risk per trade then you will need a 3.1% winner to recover your lost trade.This is a reasonable risk reward ratio.You should not at anyone time be exposed to more than a 6% risk,which means you might have 2 or 3 trades with a low risk of 2% per trade exposed to the market.It will take you a win of 6.4% of your account to get back to break even in case your trades went south.However if you lose 20% you will need a 25% win to get back to break even and if you lose 50% of your account, you will need a 100% to get your account back to where it was.Now that is extremely difficult if not almost impossible with the market uncertainties.

This link,will help you calculate how much you need to risk per trade on your account size in order to stay within the money management confines when trading.
money manager calculator

Below is an example of an account with Usd 5000 with a stop loss of 50 pips.You will require a 0.2 lot size or $20,000 for a 50 pips stop loss and 2% risk per trade. Take a look at it and learn how to risk small sizes on your positions.Wish you all the best and good luck trading.