Forex Trading And The Importance Of Money Management
There's no doubt that currency trading is growing in popularity, but unfortunately most people find that it's a very difficult skill to master. A big problem encountered by the majority of amateur traders is that they are unable to successfully manage their trading capital.
This can be critical because even if you are using a decent trading method, you may still end up losing money if you are playing with stakes that are simply too high. 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 occurs.
Sure you may get lucky and enjoy some huge winnings, particularly if you use a large amount of leverage when you open the trade. However it only takes a couple of losing trades to destroy your trading capital, and if you're not careful you may even lose all of your capital.
So the point is that you should forget about the idea of trying to generate one or two big winning trades that are going to set you up. This is basically just gambling and it's definitely not the best way of becoming a rich and successful currency trader.
It's generally a much better idea to try and build your capital up over time. Assuming you are using a proven trading strategy, you should find that your account will grow nicely in the long run 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 risk 5% of your trading capital on each set-up then you will be risking $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 winning trades will also be greater in financial terms.
I would not recommend that you risk 5% of your capital on each trade. I think 3% is a more cautious and suitable amount because it then becomes much easier to absorb a handful of losing trades without doing too much damage. We all strive to achieve a 100% success rate, but this is simply an unrealistic target, so you have to be able to withstand a few losing trades, so risking 3% of your capital is a sound strategy.
A very productive strategy is to let your winning trades run for as long as possible because this will not only mean that you require much fewer winning trades in order to make decent profits, but it will also mean that your successful trades will be far in excess of your initial stake. For example if you are prepared to risk 3% per trade, you may find that a trade that moves heavily in your favour could easily rack up gains of between 6 and 10% of your capital.
So the message I want to get across is that it's absolutely essential that you manage your money effectively and use a sensible staking plan when trading the various currency pairs. If you don't do this you will end up gambling your hard-earned money away.
This can be critical because even if you are using a decent trading method, you may still end up losing money if you are playing with stakes that are simply too high. 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 occurs.
Sure you may get lucky and enjoy some huge winnings, particularly if you use a large amount of leverage when you open the trade. However it only takes a couple of losing trades to destroy your trading capital, and if you're not careful you may even lose all of your capital.
So the point is that you should forget about the idea of trying to generate one or two big winning trades that are going to set you up. This is basically just gambling and it's definitely not the best way of becoming a rich and successful currency trader.
It's generally a much better idea to try and build your capital up over time. Assuming you are using a proven trading strategy, you should find that your account will grow nicely in the long run 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 risk 5% of your trading capital on each set-up then you will be risking $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 winning trades will also be greater in financial terms.
I would not recommend that you risk 5% of your capital on each trade. I think 3% is a more cautious and suitable amount because it then becomes much easier to absorb a handful of losing trades without doing too much damage. We all strive to achieve a 100% success rate, but this is simply an unrealistic target, so you have to be able to withstand a few losing trades, so risking 3% of your capital is a sound strategy.
A very productive strategy is to let your winning trades run for as long as possible because this will not only mean that you require much fewer winning trades in order to make decent profits, but it will also mean that your successful trades will be far in excess of your initial stake. For example if you are prepared to risk 3% per trade, you may find that a trade that moves heavily in your favour could easily rack up gains of between 6 and 10% of your capital.
So the message I want to get across is that it's absolutely essential that you manage your money effectively and use a sensible staking plan when trading the various currency pairs. If you don't do this you will end up gambling your hard-earned money away.
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