All trading systems either have a positive or negative expectancy. A trading system with a positive expectancy will make money over the long term. A trading system with a negative expectancy will lose money over the long term.
The goal of all trading system developers is to have a system with positive expectancy. If we can develop a system with a positive expectancy then we will make money in forex.
Risk of Ruin
To trade we have to know the percentage chance we have of blowing our trading accounts. When we trade with a high risk of ruin we will blow our accounts. This is a statistical reality. When we blow our account we will fail to our system a chance to earn its positive expectancy. By controlling our risk of ruin we have taken another step towards profitable trading.
The risk of ruin indicator will tell us when we are at risk of over-trading.
The only way to trade forex safely is to use the correct lot size for our account size. We need to discover what the correct lot size should be for the % we wish to risk. If we are trading 4% of our account per trade we need to know what lot size is 4 % of our account.
When we do this we are using money management.
By using money management we can reduce our trading risk during a draw down. This happens because we reduce our lot sizes when we lose money in our account. The opposite is also true. Good money management will increase our lot sizes when we are making profits.
Money management uses compounding to increase our trading profits. This is done without increasing our risk profile. Without compounding it is very difficult to make substantial profits in forex.
When we use a lot size that is to big for our trading accounts or we open too many trades at once. We are at risk of a margin call. When we combine this with a high broker leverage we maybe running a trading system with to much risk.
Our broker makes a margin call when the amount of losses equals the amount of money in our trading account. Your account is closed to stop you incurring any extra losses.