[Money Management] How to Test the Waters before Committing in Currency Trading, Fx Trading, and Forex Trading

The primary difference between the newbie and the veteran trader is awareness of risk.  People are attracted to trade currencies because they can start with very little capital. 

You can start with as little as $1,000 but need no more than $5,000. 

The least you need to succeed in futures is $20,000.  People can succeed in forex with 20 times less than in futures. 

The margin required to trade forex ranges from $100 to $380. 

A very simple rule I learned long ago is that you should never risk more than the initial margin of any currency lot you trade.  That means that you should never risk more than $380 as an absolute maximum you can risk trading currency per lot. 

Master futures trader Stanley Kroll found that the safest was to never risk more than about half the initial margin in commodities.  SPAN calculates the maximum a futures exchange can allow a trader to risk without throwing the pits into peril. 

If the maximum risk calculated by SPAN is $380 in the forex markets than it makes a lot of sense to limit risk to no more than about $190. 

That's half the risk considered acceptable by the exchange. 

The reality is that if you trade using this rule you will quickly master controlled leverage risk.  This will force you to be more observant and thus more precise with your entries. 

You will start to notice that your returns will firm up. 

In addition you will see your entry points more clearly.  This will allow you to have greater control over your forex trading process. 

Don't forget that if you are reading this and are afraid of trading currencies don't fret.  You can trade everything I teach in simulation. 

That means that you can see for yourself how the money management techniques I will reveal to you on tomorrow night's hangout will make you a more profitable investor. 

-Doc Brown