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For some reason new traders never touch upon the subject of money management during Forex training and once it’s too late, they realise it is a factor they should have considered from the start. Money management is as important as Forex trading strategies themselves. The reason is because it is the only skill that will save traders from burning out their account i.e. lose all their investment capital. Forex trading strategies do not work all the time. Reasons range from market conditions suddenly turning against the trader or simply because of human error. The reasons are irrelevant. What is important is that with every strategy comes a maximum losing limit. For instance, if a professional trader that utilises money management techniques has 3 losses in a row he/she will invest less capital in every losing trade and patiently wait until the balance is recovered. A new trader with no experience or even knowledge of money management will most likely invest a higher amount of capital after the first loss in hope to recover that loss; only to find that the next 2 losses have eaten up most of the account. This is one of the most standard occurrences with new traders. This is also why including and practising money management skills during Forex training is so crucial. It literally saves the trading account by preventing even higher losses at times of poor trading results. So in the above example money management can work in this manner: • Loss number 1 – reduce investment capital to the amount dependant on the stop loss distance • Loss number 2 – reduce investment capital even further depending on the stop loss distance • Loss number 3 – Reduce investment capital by half and maybe realise that you will be trading on the demo account for the rest of the day as nothing seems to be going your way The reason for considering trading on the demo account for the rest of the day is because by loss number 3 traders may have already reached their daily maximum loss. The reason for having a daily maximum loss is to resist temptation of constantly fighting to get into the market. In these types of situation traders are psychologically effected and could make further trading errors due to loss of focus and the creation of desperation. These acts of desperation refer to scenarios such as doubling up investment to get into the next trade to cover losses from the prior trade. Once traders lose the ability to fight desperate temptations to ‘break’ their own trading rules they should turn their screens of and walk away. The reason why desperation arrives is because in some way they think that if they don’t place the trade now they will lose out. The truth is that new opportunities will arrive tomorrow, the next day and for the rest of time. So, the clever thing to do is to simply, re-charge and re-start in the manner that works.
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