Forex Trading - Why Money Management Is So Important
James Woolley
November 25, 2009
There's no doubt that forex trading is a growing industry, but most traders find that it's not easy to become a profitable trader. A big problem encountered by the majority of amateur traders is that they do not have the ability to effectively manage their money.
This can be a huge problem because even if you are using a decent trading method, you could still end up losing some of your capital if you are playing with high stakes that you can't really afford. The worst thing you can do is to adopt a gambler's mindset and 'go large' when you are full of confidence about a particular set-up that may occur.
Sure you may get lucky and enjoy some huge winnings, particularly if you use a lot of leverage when opening the position. However it only takes a couple of losing trades to destroy your trading capital, and if you don't employ any stop losses you could easily lose all of your money.
So the point is that you should forget about the idea of getting rich quick through forex trading. This is basically just gambling and it's certainly not the best way of becoming a successful currency trader.
A more productive strategy is to try and build your capital up over time. As long as you are employing a tried and tested trading strategy, you should experience some steady long-term gains with your account increasing nicely each and every month, simply because the stakes you use will generally increase as your account starts to grow, providing you risk a certain percentage of your capital on each trading position.
For example if you are prepared to risk 5% of your money on each position then you will be prepared to risk losing $500 per trade if you start off with $10,000. However if your trading account increases to $15,000, for instance, you will then be risking $750 per trade, so as a result your gains will go up as well whenever you experience some winning trades.
I would not recommend that you risk 5% of your capital on each trade. I think 3% is a more effective staking plan because it then enables you to experience a few losing trades in a row without making too much of a dent in your capital. In an ideal world we all want a 100% success ratio, but this is impossible to achieve in reality, so you have to remember that you will experience some losing trades from time to time. Therefore risking 3% of your capital is a sound strategy.
If you're serious about making some serious money you're best off trying to let your winning trades run for as long as possible because this will automatically lower your required success ratio and it will also mean that your successful trades will be far in excess of your initial stake. For instance if you are prepared to risk 3% per trade, you may find that if the price moves a long way in the required direction, it could easily generate the equivalent of 6-10% of your overall bankroll.
So the message I want to get across is that it's absolutely essential that you manage your money effectively and use a staking plan that will allow you to build up solid gains, whilst being able to withstand a few losing trades when trading the various currency pairs. If you don't do this you will end up gambling away your hard-earned money.
Click here to read a review of Forex Mastery and to read a full Forex Income Engine 2.0 review.
This can be a huge problem because even if you are using a decent trading method, you could still end up losing some of your capital if you are playing with high stakes that you can't really afford. The worst thing you can do is to adopt a gambler's mindset and 'go large' when you are full of confidence about a particular set-up that may occur.
Sure you may get lucky and enjoy some huge winnings, particularly if you use a lot of leverage when opening the position. However it only takes a couple of losing trades to destroy your trading capital, and if you don't employ any stop losses you could easily lose all of your money.
So the point is that you should forget about the idea of getting rich quick through forex trading. This is basically just gambling and it's certainly not the best way of becoming a successful currency trader.
A more productive strategy is to try and build your capital up over time. As long as you are employing a tried and tested trading strategy, you should experience some steady long-term gains with your account increasing nicely each and every month, simply because the stakes you use will generally increase as your account starts to grow, providing you risk a certain percentage of your capital on each trading position.
For example if you are prepared to risk 5% of your money on each position then you will be prepared to risk losing $500 per trade if you start off with $10,000. However if your trading account increases to $15,000, for instance, you will then be risking $750 per trade, so as a result your gains will go up as well whenever you experience some winning trades.
I would not recommend that you risk 5% of your capital on each trade. I think 3% is a more effective staking plan because it then enables you to experience a few losing trades in a row without making too much of a dent in your capital. In an ideal world we all want a 100% success ratio, but this is impossible to achieve in reality, so you have to remember that you will experience some losing trades from time to time. Therefore risking 3% of your capital is a sound strategy.
If you're serious about making some serious money you're best off trying to let your winning trades run for as long as possible because this will automatically lower your required success ratio and it will also mean that your successful trades will be far in excess of your initial stake. For instance if you are prepared to risk 3% per trade, you may find that if the price moves a long way in the required direction, it could easily generate the equivalent of 6-10% of your overall bankroll.
So the message I want to get across is that it's absolutely essential that you manage your money effectively and use a staking plan that will allow you to build up solid gains, whilst being able to withstand a few losing trades when trading the various currency pairs. If you don't do this you will end up gambling away your hard-earned money.
Click here to read a review of Forex Mastery and to read a full Forex Income Engine 2.0 review.
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