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? If you have, then rarely you will see good players put all their chips on a single bet. As a poker player, you know by risking only a small portion of your money on a single bet, you can win or lose but be still play the next hand. If you put everything on the table on a single bet, you have to be 100% sure of winning. An impossible thing, you can never be 100% right.
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.
You can fall into many pitfalls while trading. As a trader you should be constantly guard against two emotions. Greed and fear! In case you are on a winning streak, you will become greedy. You would want to risk more to make one big win and you would want to strike it rich in one or two big trades. This will make you risk more and more of your money on a single big trade.
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 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 try to risk more to recover their original loss, ending up losing more and more. Eventually 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. - 23222
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? If you have, then rarely you will see good players put all their chips on a single bet. As a poker player, you know by risking only a small portion of your money on a single bet, you can win or lose but be still play the next hand. If you put everything on the table on a single bet, you have to be 100% sure of winning. An impossible thing, you can never be 100% right.
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.
You can fall into many pitfalls while trading. As a trader you should be constantly guard against two emotions. Greed and fear! In case you are on a winning streak, you will become greedy. You would want to risk more to make one big win and you would want to strike it rich in one or two big trades. This will make you risk more and more of your money on a single big trade.
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 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 try to risk more to recover their original loss, ending up losing more and more. Eventually 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. - 23222
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 @ 1:51 AM
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