Why Forex Money Management is Important to Traders Survival
Why Forex Money Management is Important to Traders Survival
Whenever many novice forex traders comes across the term forex money management, they either did not choose to employ it in their trading plan or they didn't even know about it. They take it as an afterthought and that the problem of money management will take care of itself if they are able to nail the perfect trade. This should raise an alarm as the existing leverage provided by brokers serves as a double edge sword.
This thing called leverage enables you to have a little amount of money to control a huge position size where you can profit the market tremendously but also can strike you down with heavy losses due to your losses multiplied many fold when you are in the red. Learning money management in trading is like learning to manage your little soldiers in battle with the market to win the trade for you or in the worse case to allow you survive another day of battle.
Once i attended a course on basic forex trading with a so called guru paying a few thousand dollars for it. I learnt the basics of forex together with some simple strategies to apply and was excited about the whole trading thing and what fortune it could bring to me. After a few trades i was on a hot streak or so i thought when i hit a few losses along the way.
The losses was starting to be more heavy and its compounding the whole time while i maintain hope that i can win all that i have lost. Alas it wasn't working and i blew the account. I thought just by setting my stop loss fifty pips away will be fine and that is all i can lose.
But i didn't know that there is calculation on position sizing and amount risk from my equity to be done. I thought that there was only one kind of position size and that is one standard lot. The amount risk is will total to about $500 each trade and that's damaging to my account.
From that point onwards, i've explored and learnt about the importance of knowing money management. Knowing set up your stop loss level isn't enough, you need to know how much you want to risk per trade and how much you can afford to lose in a single month before you go bonkers.
The norm in forex trading is that many will choose to only risk 1-2% of their equity per trade and up to 6% of their equity per month before they stop trading to reassess their strategy. Anything more than what you think is safe will result in recovering your losses more arduous.
Having a basic money management plan in place will keep you out from blowing your account and ensure you receive a loss that you can tolerate and expect. With additional money management rules such as having more advanced stop loss strategy methods allows you to minimize your losses and in fact allows you to lock in those profits you've earned along the way if you know how to.
So one may have the best trading set-up out there that is highly profitable but without a forex money management in place, no matter how profitable one is, one will soon be in the red. Trust me it will be hard to make that come back unless you are that top 1% of the traders out there.
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