If you are trading the forex markets without proper regard to managing your funds, I have bad news for you. You will, for sure, guaranteed, lose all of your money, sooner if not later.
Because I was once a commodities broker, I witnessed first hand the reckless way that most people handle their money. In fact, I had the unique perspective of watching just how crazy people would get with their trading. Read this carefully: THE AVERAGE LIFE OF A CLIENT THAT WAS TRADING THEIR OWN ACCOUNT WAS ABOUT 3 MONTHS!!! 3 months and they were toast! And absolutely the most common, number one reason they got blown out was because of poor or non-existing money management.
I know this is a topic that most people turn their nose up at, and if that’s your attitude, then good luck to you, you’ll need it. But if you will treat trading in a business-like manner, you will increase your chances of survival astronomically.
The good news is that it is super easy to control risk if you trade the forex markets. That’s because it is the biggest, most liquid market there is, turning over in the neighborhood of $2 Trillion per day!
So let’s look at a simple, yet very effective way of managing our precious capital. First, and I can’t emphasize this enough, I would highly recommend that you never risk more than 1% of your account on any one trade. I didn’t just make this up. If you take a look at how all of the very top traders in the world handle their own accounts, you will see a very common thread among them, namely that they keep their losses extremely small. In fact a loss should be so small that you just don’t care if you get stopped out because you know that it will be almost negligible.
By keeping your risk down to 1% or less, when you do have a loss the amount of money you lose will be no big deal. You will have most of your capital intact. Consider the following:
Say you have an account size of $10,000. 1% of your account would be $100. If you were to lose 5 trades in a row, but you never risked more than 1% of the account, the total loss would only be about $500, or 5% of the starting capital.
On the other hand, if you were going to show the world how it’s done, and you risked 5% of your account on each trade, after those same 5 losing trades in a row, the loss would be $2500, or 25% of the account! (Note: I realize these numbers aren’t exactly right because you’d theoretically be risking a lesser amount of money as the balance declined. This is just to illustrate a point).
Now, of the 2 examples, which do you think would be easier to recover from? Obviously the one with only 1% risk, example 1. And believe me, you will go through a time when you have a string of losses, that’s trading, and it happens to everyone.
So how do you decide on how many lots to trade each time? It’s very simple. Starting at $10,000 and risking only 1%, we know that we will not allow our total loss to exceed $100. If we enter a trade, and we know that our stop loss needs to be 20 pips away, then that means we can trade 5 mini lots, because generally 1 pip = $1, so $100 total risk/$20 risk per lot = 5 lots.
On the other hand, if the stop had to be 40 pips away, we could only trade with about 2 mini lots ($100/$40 = 2.5 minis).
That’s all there is to it! It is so very easy to calculate and implement. The difficult part is having the discipline to keep your risk under control and not trying to hit grand slams. Be consistent and be vigilant in your approach and you will be a much better trader.
Control your risk! You’ll be glad you did!
All the very best,
**To learn more about forex trading and how I teach, I have a FREE e-Book, plus 7 great videos on key trading concepts that I believe will genuinely help you. No obligation, just good useful information!