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Managing
Your Money
When you
start Forex trading, it
is important to learn the basics of money management. If you
just decide how much money you can afford to lose on a single
trade, and start trading without any system, then you are not
trading you are gambling. Forex trading is not about gambling
and trying to win the jackpot, it is about making consistent
profitable trades.
Unless
you manage your money properly while trading the Forex, then
you just as well play the casinos in Las Vegas instead...
Some gamblers
do make money in casinos, but many more people lose their money.
The only people who consistently make a profit from gambling
are the casino owners. Even when gamblers do win, the casino
owners often bribe them with free hotel rooms, free food and
drink etc. to carry on gambling, and in the end they lose all
their money to the casino. When you trade the Forex, you
need to think like the smart casino owner, not like a gambler...
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ARTCILE CONTINUES BELOW ---------------
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In any enterprise,
it is always easier to lose money than to make it, and trading
the Forex is no different. For example, suppose you lose 50
percent of your bankroll on a trade. Now you have only 50 percent
left to trade your way back to where you started. And what happens
if you lose the other 50 percent on your next trade?
Gamblers
often talk about winning streaks and losing streaks. When they
think they are on to a winning streak they keep on staking all
of their winnings on the next roll of the dice or spin of the
roulette wheel – and what happens? You’ve guessed
it, they lose all their money, and end up broke. In Forex trading
you can never rely on winning streaks, but losing streaks are
a very real and ever present danger.
Suppose
you have a trading system that returns a profit 70 percent of
the time. You would expect 7 out of 10 trades to make a
profit, and 3 out of 10 trades to make a loss. However this
ratio is only true if you average out the results of hundreds
or even thousands of trades. So if you make 100 trades, you
will probably make close to 70 profitable trades and 30 losing
trades. But what if you start trading, and your first 10 trades
are all losing trades?
The answer
is you must only trade with a small percentage
of your trading bankroll. For example, suppose you
have a starting capital of $10,000. See what will happen if
you make 10 consecutive losing trades (trading with 10 percent
of your bank on the left, and 5 percent of your bank on the
right):
| Bank |
Trade |
Bank |
Trade |
| $10,000 |
$1,000 |
$10,000 |
$500 |
| $9,000 |
$900 |
$9,500 |
$475 |
| $8,100 |
$810 |
$9,025 |
$451 |
| $7,290 |
$729 |
$8,574 |
$429 |
| $6,561 |
$656 |
$8,145 |
$407 |
| $5,905 |
$591 |
$7,738 |
$387 |
| $5,314 |
$531 |
$7,351 |
$368 |
| $4,783 |
$478 |
$6,983 |
$349 |
| $4,305 |
$430 |
$6,634 |
$332 |
| $3,874 |
$387 |
$6,302 |
$315 |
If you
started with $10,000 in your bank, and trade with 10 percent
of your bank each time, then you would have $3,874 - $387
= $3,487 left in your bank after 10 losing trades. But you
would have $6,302 - $315 = $5,987 left in your bank if you
traded with just 5 percent each time. (Of course if you
had traded with $1,000 each time, you would be cleaned out
after 10 losing trades.)
If your
system returns 50 percent profitable trades, and 50 percent
losing trades, then you would expect to get 10 consecutive losing
trades once in every 1024 trades. (And they might be your very
first 10 trades!) If your system returns 70 percent profitable
trades, and 30 percent losing trades, then you would expect
to get 10 consecutive losing trades once in every 169,350 trades.
This is
not very likely to happen in your first 10 trades, but it is
still more likely than your chances of winning your state or
national lottery. This also demonstrates the importance of
developing a system that returns a high percentage of profitable
trades.
By risking
no more than 5 percent of your bank at any one time, you should
be able to ride out even long losing streaks. The other advantage
is, as the overall amount in your bank increases you can trade
with larger margins, and hence make larger profits.
Note:
When you trade with an odd amount, e.g. 5 percent of $6,302
= $315, always round down. So you would buy 1 mini lot at $100
(with a 1 percent margin) and leave the other $200 in your account,
just in case the trade moved against you.
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