Money Management Principles in Forex Trading (Part I)
Before you open an account with a forex broker and start trading live, you should know that the most important thing for you is good money management. Money management means how much of your portfolio, you are willing to risk on a single trade. How many contracts your risk tolerance warrants?
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 that currency trading is far more complicated than playing poker. You will be dealing with hundreds and hundreds of unknown variables that affect the markets what to talk of only 52 cards. You must understand and implement good money management principles in order to succeed at forex trading.
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.
When you lose a trade, you become afraid to risk enough of your money on the next trade. Fear takes over and impairs your decision making, making you lose confidence in your judgment and decision making. Lets see how fear and greed can play havoc with your trading.
Lets suppose you have a run of successful trades that makes you very happy. You are feeling overconfident. You are not satisfied on risking only 2% of your account on one single trade and you want to risk more on the trade. You are thinking, the more you have in a trade, the more you will make if you are right. You are willing to increase your risk to 5%. You increase it to 5% and you win. You increase it further to 10% and you once again win. You finally decide to put 25% of your account at risk on the next big trade, but misfortune strikes all of a sudden. Your successful run comes to an end and you lose big.
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 become desperate and try to risk more to recover their original loss. They end up losing more and more and very soon those investors destroy their accounts. Most of them are out of trading forever soon. There are other traders who try to reduce risk even more on making a losing trade; eventually they lose any opportunity for meaningful growth in their accounts. - 23208
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 that currency trading is far more complicated than playing poker. You will be dealing with hundreds and hundreds of unknown variables that affect the markets what to talk of only 52 cards. You must understand and implement good money management principles in order to succeed at forex trading.
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.
When you lose a trade, you become afraid to risk enough of your money on the next trade. Fear takes over and impairs your decision making, making you lose confidence in your judgment and decision making. Lets see how fear and greed can play havoc with your trading.
Lets suppose you have a run of successful trades that makes you very happy. You are feeling overconfident. You are not satisfied on risking only 2% of your account on one single trade and you want to risk more on the trade. You are thinking, the more you have in a trade, the more you will make if you are right. You are willing to increase your risk to 5%. You increase it to 5% and you win. You increase it further to 10% and you once again win. You finally decide to put 25% of your account at risk on the next big trade, but misfortune strikes all of a sudden. Your successful run comes to an end and you lose big.
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 become desperate and try to risk more to recover their original loss. They end up losing more and more and very soon those investors destroy their accounts. Most of them are out of trading forever soon. There are other traders who try to reduce risk even more on making a losing trade; eventually they lose any opportunity for meaningful growth in their accounts. - 23208
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. 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 @ 12:54 AM
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