Money Management in Forex Trading (Part I)
Many forex traders start trading live before understanding and learning good money management rules. Develop a few good money management rules and practices them on your demo account before starting live trading. Developing your money management rules mean how much of your money, you are willing to risk on one trade. It also means determining how many contracts per trade your risk tolerance allows?
The important question is how you can improve your investment results by making small changes to your trading strategies. Proper money management can be the difference between becoming a successful forex trader in the long run or an unsuccessful one who decimates his/her account in a few weeks.
Have you ever played poker? If not, watched it being played online or on TV! If you have then you will never see a good poker player play all his/her cards on a single bet. Good poker players know that by risking only a small percentage of their money on a single bet, they can win and lose. But he/she will still play the next hand. If he/she puts everything on the table on a single bet; it will have to be a 100% sure bet. An impossible thing, you can never be 100% sure. Life is full of probabilities. Nothing is for sure.
You must know this that currency trading is far more complicated as compared to playing poker. You will be dealing with hundreds and hundreds of variables that can affect the markets. What to talk of only 52 cards. You must understand and implement good money management rules in order to succeed at forex trading in the long run.
There are many pitfalls that you will run across while trading. A trader is constantly under the pressure of two emotions; greed and fear. When you win a trade, you become greedy and want to risk more to win big. You want to strike it rich in a few trades. This drives you to take more and more risk.
In case you lose a trade, you will become fearful of risking your money on the next trade. Now, fear will take over and impair your decision making. Fear will make you lose confidence in your judgment and decision making. Lets see how fear and greed can impair your trading results.
Lets assume you have a run of successful trades. You become overconfident. You are not satisfied by risking only 2% of your equity on a single trade. You want to risk more on the trade because the more you have in a trade, the more you will make if you are right. You increase your risk to 5%. You win. You increase it further to 10%. You again win. Now, you finally decide to put 25% of your equity at risk on a next trade. Misfortune strikes, your successful run comes to an end. You lose.
Suppose you had a $100,000 account and you had foolishly risked 25% ($25,000) on one single big trade. You desperately wanted to win but lost. Losing $25,000 means you have only $75,000 in your trading account now after your loss. How much you need to make to get back the original account balance of $100,000; you need to make $25,000 again. It means you will have to make 25,000/75,000= 33% in order to get back to the original amount. You risked 25% but now you will need to make 33% to breakeven.
Many investors once they lose a trade try to risk more to recover their original loss, ending up losing more and more. Very soon those investors destroy their accounts and are out of trading forever. There are other investors who try to reduce risk even further on making a loss; eventually they divorce themselves from any opportunity for meaningful growth in their accounts. - 23217
The important question is how you can improve your investment results by making small changes to your trading strategies. Proper money management can be the difference between becoming a successful forex trader in the long run or an unsuccessful one who decimates his/her account in a few weeks.
Have you ever played poker? If not, watched it being played online or on TV! If you have then you will never see a good poker player play all his/her cards on a single bet. Good poker players know that by risking only a small percentage of their money on a single bet, they can win and lose. But he/she will still play the next hand. If he/she puts everything on the table on a single bet; it will have to be a 100% sure bet. An impossible thing, you can never be 100% sure. Life is full of probabilities. Nothing is for sure.
You must know this that currency trading is far more complicated as compared to playing poker. You will be dealing with hundreds and hundreds of variables that can affect the markets. What to talk of only 52 cards. You must understand and implement good money management rules in order to succeed at forex trading in the long run.
There are many pitfalls that you will run across while trading. A trader is constantly under the pressure of two emotions; greed and fear. When you win a trade, you become greedy and want to risk more to win big. You want to strike it rich in a few trades. This drives you to take more and more risk.
In case you lose a trade, you will become fearful of risking your money on the next trade. Now, fear will take over and impair your decision making. Fear will make you lose confidence in your judgment and decision making. Lets see how fear and greed can impair your trading results.
Lets assume you have a run of successful trades. You become overconfident. You are not satisfied by risking only 2% of your equity on a single trade. You want to risk more on the trade because the more you have in a trade, the more you will make if you are right. You increase your risk to 5%. You win. You increase it further to 10%. You again win. Now, you finally decide to put 25% of your equity at risk on a next trade. Misfortune strikes, your successful run comes to an end. You lose.
Suppose you had a $100,000 account and you had foolishly risked 25% ($25,000) on one single big trade. You desperately wanted to win but lost. Losing $25,000 means you have only $75,000 in your trading account now after your loss. How much you need to make to get back the original account balance of $100,000; you need to make $25,000 again. It means you will have to make 25,000/75,000= 33% in order to get back to the original amount. You risked 25% but now you will need to make 33% to breakeven.
Many investors once they lose a trade try to risk more to recover their original loss, ending up losing more and more. Very soon those investors destroy their accounts and are out of trading forever. There are other investors who try to reduce risk even further on making a loss; eventually they divorce themselves from any opportunity for meaningful growth in their accounts. - 23217
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Discover A Revolutionary New Forex Robot. Try Netpicks Forex Signal Service.
posted by X - Men @ 12:56 AM
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