Tag Archive for ‘forex’

Many forex traders start trading live too soon. They dont have any understanding and learning of good money management rules. As a forex trader, you need to develop a few good money management rules. Practice them on your demo account before starting live trading. By developing your own money management rules you are comfortable with means how much of your money you are willing to risk on one single trade. You also need to determine how many contracts per trade your risk tolerance allows?

The important thing when you start trading is to learn how you can improve your investment results by making small changes and tweaks to your trading strategies. Good money management rules can make a huge difference between becoming a successful investor in the long run or an unsuccessful one that blows up the account in a few weeks.

Have you ever played poker or watched it being played online or on TV! If you have then you will never see good poker players play all their cards on a single bet. Good poker players know that by risking only a small amount of their money on a single bet, they can win or lose but will still play the next hand. If they put everything on the table on a single bet, they will have to be 100% sure of winning, an impossible thing. You can never be 100% sure. Life is the game of probabilities.

Forex trading is far more complicated than playing poker. You are dealing with hundreds of unknown variables that affect the markets instead of only 52 cards. To succeed in forex trading, you must understand and implement the money management principles.

Many pitfalls will cross your way while trading. As a trader you should be constantly aware of two emotions; greed and fear. In case you win a trade, you will become greedy and would want to risk more to make one big win. You would want to strike it rich in one or two trades. This will drive 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.

Assume you had a $100,000 trading account. You had foolishly risked 25% or $25,000 on one trade that you desperately wanted to win. Losing $25,000 means you have only $75,000 in your account left. How much you need to make to get back the original balance of $100,000. You need to make $25,000 again to go back to the original balance. It means you will have to make 25,000/75,000= 33%. So you risked 25% but now you need 33% to get back your original amount.

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.