For some reason new traders never touch upon the subject of money management during Forex training and once it’s too late, they realise it is a factor they should have considered from the start. Money management is as important as Forex trading strategies themselves. The reason is because it is the only skill that will save traders from burning out their account i.e. lose all their investment capital.
Forex trading strategies do not work all the time. Reasons range from market conditions suddenly turning against the trader or simply because of human error. The reasons are irrelevant. What is important is that with every strategy comes a maximum losing limit. For instance, if a professional trader that utilises money management techniques has 3 losses in a row he/she will invest less capital in every losing trade and patiently wait until the balance is recovered. A new trader with no experience or even knowledge of money management will most likely invest a higher amount of capital after the first loss in hope to recover that loss; only to find that the next 2 losses have eaten up most of the account. This is one of the most standard occurrences with new traders.
This is also why including and practising money management skills during Forex training is so crucial. It literally saves the trading account by preventing even higher losses at times of poor trading results. So in the above example money management can work in this manner: