No matter how good your Forex trading strategy is, you will lose some of your positions. There is no such thing as a 100% sure win in trading, so eventually you will encounter some loss. This is where the money management kicks in and helps you to limit your drawdowns in order to save your trading account from the complete
The problem with the drawdowns is that if you lose 10% of your account you need to recover 11% of what remains to return to the breakeven point. Losing 20% will require 25% gain over the remaining balance to recover. As you see, if you trade with the percentage risks, recovering from losses is much harder if you lose more. Trading with a little risk ratio is a good idea to prevent such problem from occurring. If you trade long enough youll encounter the streaks of losing trades — with 10 losing positions in a row and 10% risk ratio youll lose more than 60% of your initial balance. But if you trade risking only 3% of your current balance youll end up with 26.3% total loss. You do not need to be a genius to see that its a lot easier to recover after the 26% loss than from 60% loss.
Of course, trading with small amounts of your account does not look very promising, because you decrease your potential profit. But believe me, if you somehow lose 70% of your account — and that is not a hard thing to do if you risk a big part of your capital with each trade — you will have to more than double your remaining funds to reach the breakeven point. Remember, that all professional Forex traders (and even professional poker players) always risk only a small fraction of their capital with each trade.