Money management is a critical part of trading and will be the difference between winners and losers. In order to make money we have to learn how to manage it.
For those trading a good strategy or system, the traders who use good money management will be those who will succeed, for those traders who are trading the exact same strategy not using good money management will become a statistic of the 95% losing traders. Most traders just do not understand how important the art of money management is. Money management is the most significant part of any trading system, as it represents the amount of money you are going to put on one trade and the risk you are going to take for each trade.
The number one reason new traders fail is not because they are useless, but because they are undercapitalized from the start and don't understand how leverage really works
There are different money management strategies, and they all aim at preserving your balance from high risk exposure.
A really good method of money management, which is used by many professional forex traders, is to use a percentage of your equity as your risk. For instance, if you have an account of $5000 and you decide that 3% is what you are prepared to risk on each trade, then you would use the correct lots and stop loss to achieve this.
The most important factor is to preserve your trading account, so why would you take a high risk of losing a large amount of money on each trade? If you are starting out with a $500 account, why would want to risk $100 on every trade?
As your account increases, so your risk can increase, and if your account decreases in size then you would decrease your risk. While decreasing the lot size when you are experiencing losses, minimizes the chance of you wiping out your equity. Conversely, by progressively increasing the lot size when you are profitable, your equity compounds.
Obviously, by using a small risk on each trade your profits will be smaller too, but there is no return at all without some risk. Those who care about building their account up slowly will be those who succeed at the end of the day.
While mastering the money management side of your trading, another extremely important aspect of trading is mastering your emotions. Controlling your emotions in forex trading is made much easier if you do not have to worry unnecessarily about losses. In other words, fear of loss.
If you start your forex trading off with an amount of equity, not meant for food or rent, and you trade with low risk, you will not worry if you take a couple of losses in a row.
Be confident in your trading strategy, trade with a small percentage of your equity, do not be greedy, and you will succeed.
Linda Wainman is the author of the day trading book "Keeping it Simple". http://day-online-trading.com Get access to free forex signals for 3 months! NOTE: You have full permission to reprint this article within your website or newsletter as long as you leave the article fully intact and include the "About The Author" resource box. Thanks! :-) |
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