Money Management

You’ll find that everyone has their own perspective on how much they are willing to risk on any given trade. But for every story you hear about somoene who has made a fortune in the market by trading aggressively, there are thousands who have lost their fortunes by doing the same.

Some of the other signals providers you have probably been introduced to here recommend making large trades using a sizable percentage of your account.

You can “win big” doing this – but it’s a very risky proposition – and from my perspective the first rule in making money in the FOREX is “don’t lose money”.

I trade pretty well, but I don’t always win. Neither do you. Or if you do, I want to subscribe to your signals service, not the other way around!

So when you put half your account on one trade and win, you feel great, right?

But when you lose, it’s dismal.

And the thing about FOREX is that you can lose quickly and dramatically. And a trade that might be a long term winner can become a loser for you if it retraces in the short term and stops you out or causes a margin call.

Leverage is the thing that makes the FOREX work for speculation. Getting 100-1 leverage or more is commonplace for retail traders. This means that you can risk 2% of your account and have twice the purchasing power that your cash value would otherwise provide. But when that goes against you – and sooner or later it will – your wins and losses are both multiplied by the size of your leverage.

You say you understand that. Perhaps you do. But consider this:

If you regularly invest 50% of your account, it takes only one loss to wipe out half your wealth.

If you instead invest 25% of your account, you would have to lose twice in a row – still all too common!

If you were to invest 10% of your account at a time, seven losses will cut your account in half.

How about 5% of your account? It’s about fourteen losses.

At 2% of your account, you can lose thirty-five times in a row before you lose half your account.

You might think losing more than a few times in a row is just not going to happen. But it does. Don’t take crazy risks.

I tell you this and I expect you will take big risks anyway. Here are my rules.

I don’t put more than 2% of my account out there on any given trade. 

I never take more than 2 trades at once – which is not hard since I only trade three pairs.

Once a trade has moved my way, I lock in profits by putting a stoploss at break-even or slightly above it. I periodically move this point as the trend continues, so as to not lose too many pips if it retraces.

Start with the premise that in order to make money the first thing you must do is not lose money. Be prepared to see yourself stopped out at breakeven or with a slight gain on a retracement … and then see the market resume its original trend. Don’t let this annoy you. You can always get back into a winning trade. You do not always get to get out of a losing trade.