Why Money Management is Crucial in Forex Trading

Money management is a very important discipline for all those who try their hand at online trading. It is also a complex discipline, but not for this reason within the reach of a few. Depending on the approach used, it can be "scalable", i.e. used for more or less ambitious goals, associated with more or less difficult tools. Here's what money management is and why it's so important.

What is money management

Money management is that practice which, very simply, in the context of online trading, allows you to best manage capital. Specifically, it allows you to optimize profits and limit losses. Depending on the purposes and contexts in which it is used, it can turn into "risk management". In this case, its function is to limit the effects of risky trades. How to practice money management. It depends, in fact, on the uses, but also on the knowledge of the trader. In the "lightest of hypotheses", i.e. if a beginner practices it, money management consists in the placement of stop losses and take profits, i.e. the levels reached which the position is automatically abandoned (in the first case to limit losses, in the second case to protect profits).

The importance of money management

Optimizes profits and losses. Stop losses are used to contain losses. Simply put, when the position has generated losses to the limit of sustainability, it is automatically canceled. Money management offers precisely the elements to position stop losses. The same goes for take profits, which are exit levels aimed at preserving a profit, placed at resistance levels. It's flexible. Money management is for experts and less experienced individuals. It can be used according to different degrees of complexity. In the softest hypothesis, it is used to decide stop losses and take profits. Reduces discretion. Money management is programming. If the trader has a program, perhaps aimed at managing the unexpected, the room for discretion, and therefore for errors, is reduced. Reduces emotional stress. Reducing discretion means reducing the decision-making space right at the moment when making decisions would be harmful, i.e. in the middle of the trade. Harmful, because it subjects the trader to emotional stress. It can therefore be said that money management lightens the emotional load of traders (and protects against the danger of making reckless and emotionally driven gestures).