HOW TO USE MONEY MANAGEMENT PRINCIPLE IN FOREX TRADING

You don't need to ignore this principle if you really want to make good money from the Forex market in the long run. Gamblers don't last long in this market. Professional traders use money management principle by adding a good risk management system to all their trades. This is a way of protecting your capital from bad trades.

The knowledge of how to manage your risk is very important and should not be ignored as this determines your long term success in the market. The concept of loss is inevitable in the Forex market. For you to survive, you need to mange your loss so as not to cut deep into your capital. There is no trading system with 100% accuracy so, losses will always come but your ability to minimize them determines your survival.
With the risk management, you are looking at a long term returns on investment and not a jackpot. Risk management is a system use by investors to control their trading losses. As you are thinking of making profit, also make a provision of how much loss you can afford to bear in case the trade turns against you.

UNDERSTANDING THE USE OF STOP LOSS

This is a tool use to set up when a trader can afford to leave the market with a loss in case if the trade moves against him. It is very important to use this tool effectively because the level of risk a trade carries is determined by the value of the stop loss. This means that a higher stop loss value means a higher risk level while a lower stop loss value means a lower risk level. There are some trading strategies that reqiure the use of fixed exit stop loss and some that require a variable exit stop loss. It is very important for a trader to use stop loss before opening any position because the concept "loss" is inevitable in this market but your ability to manage it properly determines your success.

YOUR RISK LEVEL

You have come to understand that the value of your stop loss determines your risk level. Then, next question is how will you choose your risk level? Different traders have different opinions to the choice of their risk level per trade. From my experience, i think percentage risk level should be drawn from 2% to 3% of your trading capital per trade.

Assuming you are trading with a capital of $2000 and using 3% risk level per trade. With 30 pips stop loss per trade, your risk level will be 3/100 * $2000 = $60.
The amount you gain/loose per pip = $2 ( i.e $60/30 pips)

PROFIT TO LOSS RATIO

This is the ratio of your profit to your loss. Using 3:1 profit to loss ratio means that you are placing your trades only when you have a chance to make three times of what you set to loose. Assuming a stop loss of 20 pips, a trader using 3:1 profit to loss ratio will only place his trade when he sees the chance of making 60 pips profit. This trading rule will increase your chances profitably.