Money Management 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 thing in trading is to learn how you can improve your investment results by making small changes to your trading strategies. Good money management rules can make the difference between becoming a successful investor in the long run or an unsuccessful one.
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.
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.
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. You are feeling overconfident and you are not satisfied by risking only 2% of your account on a single trade. You want to risk more on the trade. 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 once again win. You finally decide to put 25% of your equity at risk on a next trade, but 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. - 23221
The important thing in trading is to learn how you can improve your investment results by making small changes to your trading strategies. Good money management rules can make the difference between becoming a successful investor in the long run or an unsuccessful one.
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.
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.
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. You are feeling overconfident and you are not satisfied by risking only 2% of your account on a single trade. You want to risk more on the trade. 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 once again win. You finally decide to put 25% of your equity at risk on a next trade, but 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. - 23221
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 @ 1:16 AM
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