The desired goal for every trader who engages in Forex trading is to be successful. Therefore the question on everyone’s lips is How do you maximise the chances of success, without increasing the risk or exposure to the markets?

The answer is simple. Money management. Employing strategies that ensure to limit the exposure is key to traders of any level.

The 2% MONEY MANAGEMENT RULE.

A simple yet effective strategy to money management, is the 2% rule. This rule indicates that a trader should not risk more than 2% of their available capital in any single trade.

If we assume that available trading capital is $5,000 and an individual is considering placing a TRADE with a HIT rate of 50%. How much should he expose to that particular trade?

Committing all $5,000 in this trade will give the trader a 50% chance of doubling their capital, but the trader also has a 50% chance of risking their capital. For sure that’s an exciting prospect, but not ideal if the trader is looking at his long-term trading career.

Splitting the $5,000 in two trades, would increase the traders risk exposure. Whereas, if the trader chooses to split their available capital into 5 different $1,000 trades, they would significantly reduce their exposure. However, the amount the trader is investing each time could still be considered high, as they would be risking 20% of their available capital.

Following the 2% RULE, means that the trader would only by exposing $100 per trade thus keeping their exposure to a minimum. The 2% RULE eliminates their chances of risking their available trading capital.

HOW TO CALCULATE THE RISK OF ANY TRADE?

RISK OF TRADE = (ENTRY PRICE - STOP LOSS PRICE) x QUANTITY TRADED

The risk of a trade can be calculated by taking the difference between the entry price and the stop loss price and multiplying it by the quantity traded.

If the 2% RULE is followed, the only way to risk all available capital would be for the trades to be unsuccessful 50 times in a row. Using simple maths, the probability of that happening would be around 0.000000000000000001%.

Therefore, as a long term professional investor, the focus should not be on short term success. It should be LONG TERM, ensuring that the trader will not lose their capital but rather increase potential success.

Careful and planned money management will not only help preserve the capital, but also help improve trading results throughout the trading journey.

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This article / blog is for information purposes only and there are multiple techniques, in addition to those mentioned herein, which could be used. Readers should use their own and/or advisor’s judgement and guidance before proceeding further with the suitable management methodology.