Forex 1 Trading Club

3 Responses to “what is money management as applied to forex trading?”

1. Gokiburi says:

   February 17, 2010 at 9:11 pm

   Yes, cannot stress that enough. Everyone who really trades forex will tell you this.
   Think of it this way. You have $10,000 in your FX account. If you have 100:1 leverage ratio, you’re controlling $100,000 with $1,000 of your own money, so you can lose more than your initial bet. Everyone tells you to be careful, because you can get wiped out in a few hours if you ***** up.

   Here’s a more common scenario–happened to me. You get into FX, win some, lose a few, nothing major. I had about $4000 in my account. I usually use really low leverage (20:1 or so, low for retail FX), to play it safe. But I was nailing trade after trade, and made about a grand in a few days. So late at night, I hopped into a trade, determined to make another hundred bucks or so before I brushed my teeth and went to bed.
   Instead, my position went sour, and started dropping like a stone. I had never seen it drop so quick, and I was in the hole about $150 after about 1 minute, so I bought more, to drop down my average price, and more, but it kept going down. After a stressful 2 hours or so of rising a bit, but staying negative, I eventually cased out and lost $2000. Half of my account.

   It sounds dumb, eh? But its human nature. On wall street or in London, the Big traders, after they score a big one, like a trade that nets 300% or something like that, are forced to take a vacation from trading for a while, so I hear. The reason is that winning big gives you a feeling of invincibility.

   Anyway, sorry for the boring story, here are some tips I wish someone would have given to me.

   1. A demo account and a live account are completely different. Having real money in the game changes everything.
   2. The first book you should read–before losing or making any money, is one about Trading psychology. Understanding your strengths, weaknesses, and common reactions–things like fear, greed, caution, patience–knowing these will save you and may even make you a fortune.
   3. Money management is simply self discipline. A good rule for beginners is you should never wager more than 1 or 2 or at most 3% of your equity (real money) on any one trade. Like $10000, you have to put stop losses on your trades so a loss is never more than $100 or $150 or so. Enforce that rule, put bad trades out their misery.

   Money management, and an understanding of the basics of trading–psychology, probability (Risk-reward), technical analysis, understanding the software you’ll be using (or trading platform)—these things are way more important than being a financial genius, or being able to predict the future.
   That’s why a 20 year old kid in Sweden with a computer can outperform every hedge fund in the world. Just making probability and self discipline work for you. You don’t need to be George Soros.
2. Suzane P says:

   February 19, 2010 at 2:36 am

   I believe there are two ways to practice successful money management. A trader can take many frequent small stops and try to harvest profits from the few large winning trades, or a trader can choose to go for many small squirrel-like gains and take infrequent but large stops in the hope the many small profits will outweigh the few large losses. The first method generates many minor instances of psychological pain, but it produces a few major moments of ecstasy.

   On the other hand, the second strategy offers many minor instances of joy, but at the expense of experiencing a few very nasty psychological hits. With this wide-stop approach, it is not unusual to lose a week or even a month’s worth of profits in one or two trades.

   Regards
3. Mike Sanders says:

   March 7, 2010 at 9:21 am

   Helo Suzanne

   Thanks for your message. I blieve that you have the right understanding on forex.

   Mike