Money Management in Forex Trading

Whatever trading strategy you use in your trading it can be boiled down to the following three steps.

1. Picking the currency pair that suits your trading strategy.

2. Applying the strategy to get a trading signal.

3. Executing the orders according to the signal.

These are three stages are well known in theory of management:

1. Collecting and analyzing the information.

2. Forecast of the situation development.

3. Making management decisions for correction in case when dynamics of the development deviates from the projected course.

The developers of trading systems pay attending to these similarities. For example they use different methods to forecast the price movement. It can be some simple combination of indicators or something complex and expensive such as a solution based on neural networks algorithms.

There are a lot of trading systems used for setting market orders. Most of them allow programming the rules of trade execution for automated trading. But it is the user who must develop the rules. Otherwise these automated systems will not be profitable.

It seems that if people use elements of management theory they should achieve the level of success that achieved in traditional business. However it is not the case. Most traders fail. So what's the problem?

The problem is in disregarding the personal factor of a trader in this equation. It is the personal preference that plays a crucial role for a trader to follow or not to follow his trading system.

If a trading system is in place and you have chosen a currency pair the most important and most difficult part is actually executing the system. And this is where most traders fail to follow through with their systems. Their emotions make them violate their own rules. For instance trader sees a trading opportunity but hesitates to execute the trade. After that he sees the price is moving in his favor and jumps into the market just to find out that it's too late and market now is reversing against him.

To avoid such trading errors trader needs continuous practice of taking trades. First you need to take trades on historical data. Once you verified the profitability of the system take the trades on a demo account as many times as possible before switching to a live account.