The seven deadly Forex Trading mistakes - Part Three

The seven deadly Forex Trading mistakes - Part Three

So far we have seen how not to stick to a strategy Forex, not our commercial plans will inevitably lead to loss. Now I want to talk about one aspect of planning in more detail - money management.

You're probably thinking that is really really boring topic, but before you decide to skip this article, let me say that money management is not just about making sure you survive long enough to turn a profit, it also so you can open a whole new trade opportunities for you.

Number Three error - not understanding Money Management

There are two different sides of this issue, and for some unknown reason, most people only when you are talking about one of those - survival - or what we call classic money management. It is very important though, so let's cover it right now.

The idea is simple, first, we have a pot of money for trade. Secondly, as established, losses are part of the Forex Trading and so there will be times when the cash in the pot is reduced, rather than increases. Therefore, it is obvious that if we fail it over properly, it is quite possible that we lose it all and can no longer trade.

So, the concept of a classic money management is to trade with such a way that our Sun loses disproportionately affect our ability to trade. One example will make this clearer:

Assume that we have a starting balance of $ 5000. We want to make sure that we can survive in this Forex Trading game for at least six months - long enough to prove our strategy Forex and ability to turn a profit. At its simplest, we can say therefore that the maximum afford to lose each day is $ 40. If you hit that limit, we would stop Forex Trading for the day. This will keep us "in play" for our six months of assuming the worst case scenario of losing every day.

We could expand this money management strategy Forex to say that if we lost the maximum limit of $ 40 per day for four days in a row, we would not trade the fifth day of the week, and if we lost 3 weeks in a row We would not trade the last week of the month, and so forth. If we were losing as bad as it is clear that something would be wrong or strategy Forex or our ability to execute and implement, these breaks will offer the opportunity to step back and analyze where we go wrong.

Assuming $ 40 per day maximum loss, it is obvious that we can not enter any trade where the possibility of loss was greater than $ 40 - to do so would be to expose our account to a greater loss than is permitted . Thus, our daily limit gives us a starting point for calculating risk and reward ratios for actual Forex Trading setup.

Knowing in advance the maximum we can lose in any one day or on any one trade gives us a huge psychological advantage to our trade, as well as keeping us in the game long enough to enable our strategy Forex to turn into profit.

There is as I mentioned, the other side of money management - a position size. Many traders will trade fixed position sizes based on availability of funds. This is perfectly correct, but it means that when looking at the instruments of trade, they are inherently limited in what they can be traded. Dynamically adjusts the size of the position of the trader is willing to take the prices of basic instrument can open a whole new trade opportunities.

For many more expalanation, I will refer to an article previously written on this topic, you can find it here.

Action: In order to give the best chance for survival in the market, we must define clear rules for managing the money of our Forex Trading, based on our available capital. Doing so will give us the added benefit of relieving the psychological pressure involved in taking losses, and opening new opportunities for Forex Trading, which previously could be considered too risky.

In our strategy Forex, a plan for Forex Trading and money management taken care of, we are ready to trade! In the next article will look at another mistake that many traders do in their impatience to earn big profits.