Money Management in Trading: The Complete Guide to Protect Your Capital
What Is Money Management in Trading?
Money management in trading refers to how traders control their capital, risk, and position size to avoid large losses and achieve long-term profitability.
In Forex, money management is considered more important than indicators or strategies.
Risk Per Trade (Core Rule)
Risk per trade defines how much of your account you are willing to lose in a single trade.
Common rule:
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1% risk per trade (conservative)
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2% risk per trade (standard)
Example
Account balance: $1,000
Risk per trade: 1%
Maximum loss per trade: $10
Position Sizing in Trading
Position size determines how many lots you should trade.
Formula
Correct position sizing prevents overtrading and account blowups.
Risk-Reward Ratio (RR)
Risk-reward ratio measures how much you risk to gain profit.
Example
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Stop loss: 50 pips
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Take profit: 150 pips
➡ Risk-Reward = 1:3
Recommended: RR ≥ 1:2
Drawdown and Capital Protection
Drawdown is the percentage loss from the account peak.
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Low drawdown = stable system
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High drawdown = high risk
Good money management aims to keep drawdown under 20–30%.
Basic Money Management Rules
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Risk only 1–2% per trade
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Always use stop loss
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Avoid high leverage
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Do not increase lot size after losses
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Diversify trading pairs
Common Money Management Mistakes
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Overleveraging
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Martingale lot scaling
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No stop loss
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Emotional trading
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All-in trading
These mistakes are the main reason traders lose money.
