In the viewed lesson so far we’ve been learning how to analyze markets, where should be our entry and exit points, where to put stop loss and take profit orders. If we mastered all techniques, will be enough to become profitable traders. The answer to this question is that you’ll lose your account even if you have high percent of good analysis. The final piece of puzzle for become profitable trader is Money Management.
Why is it important? Well, we are in the business of making money, and in order to make money we have to learn how to manage money. When you trade without money management rules, you are in fact gambling. Money management rules will not only protect you but they can make you very profitable in the long run. The key component is risk. You should take small loss and high profit. In fact, many successful traders take more losing trades than winning trades. The difference for them is that the winners are allowed to run their course while the losses are taken quickly.
Have you ever think why professional poker players win? One of the reason is risk management. If the relay on luck and good combination they will lose lot of money. The main reason for making money is that they are good statisticians, they know how to control losses. If they are in losing series they managed to control their accounts thanks to their discipline and managing risk. The reason is that the good poker players practice money management because they know that they will not win every tournament they play. Instead, they only risk a small percentage of their total bankroll so that they can survive those losing streaks.
The reality is that very few traders have the discipline to practice this method consistently. On forex market 90% lost their money just because they don’t know how to control the risk and have no discipline. You should risk small percent of your account 1-2% no more, small percent keeps you away from bankruptcy if you go in very bad series.
Risking no more than 2-3% of the total account per trade, how does it work in practice?
Let’s take a look at the example that shows a difference between risking a small percentage of capital and risking a larger one. In the worst case scenario with ten losing trades in a row the trading account will suffer this much:
Don’t be thinking that 2% is very small amount and you’ll not make money. You firstly must survive forex and then make money. Don’t forget that it’s 2% risk but the reward is much bigger, we will discuss this in the following lesson.