What could go wrong with following the simple money management? It is a major rule of trading they will tell you about in any educational video, book or guide. However, it is still hard to find a trader who at least once during his career didn’t ignore this golden rule proved by thousands of drained deposits.
And today we are going to discuss the major rules of money management. Let’s start.
How often do we hear that $200, $100 or even $50 is enough for the initial deposit? Don’t be so naive. Only a few traders can be patient enough to enjoy the tiny profits, the rest of them will immediately start to set the risks too high in the hope of a tenfold increase for the initial deposit. And this is the recipe for draining a deposit completely. That’s why it’s recommended to estimate the deposit’s sum appropriately before and during the trading process.
It may seem like a good idea at first to enter the market with a small deposit and huge leverage to increase the trading volume. But it’s another common mistake. The majority of professional traders agree on the preferable size for the best trading leverage – 1:100.
This means that you shouldn’t open too many trades at the same time. Consider the increasing pressure on your deposit. And keep in mind that in a bad scenario the series of averaging trades can lead to more losses than a single fixed loss.
No matter how sure you are in your analysis, no matter how much you want to gain the maximum profit, you must never raise the lot too high. The preferable size is 5% of your deposit. But it’s better to limit to 2-3%.
It is just suicide to believe that you can do Forex trading without using stop-losses and take-profits. At least in such a way, you will surely “kill” your deposit. The market likes to mock overconfident traders. There is always a high chance that unexpected news or a natural disaster will make your balance equal to zero. No matter what – always protect your trades!
This method of monitoring the trades is available to every trader. It is better than breakeven and will let to fixate the profit with the more preferable rate, in the case of an unexpected sideways trend. And mentally it’s much easier to trade this way.
We strongly recommend avoiding the trades where the ratio of profits to losses is less than 1:2. In practice, the most preferable ratio is 1:3, i.e. one profitable trade must cover the losses from 3 failed trades.
Yes, you should consider your biological clock even when you are trading. Do not enter the market if you feel sleepy or exhausted. In such a condition your brain works less effectively, that is why the risk of making a mistake increases drastically. And it’s unlikely that you will be able to monitor trades in this state.
Forex is not a casino. Hence, you won’t be able to hit the jackpot. A prosperous trader manages to achieve success because he prefers today’s hens to tomorrow’s eggs, i.e. gaining a huge profit in small parts.
For instance, if your account’s balance is only $200, it will be wiser to avoid trading gold. There is a high chance of draining the whole deposit before you even understand what is going on. But the same initial deposit will be more than enough to trade the Euro Buck with some confidence.
Needless to say, you must improve your trading skills: read the specific literature, predictions of analytics, try to make your own conclusions based on the information you read. It has never been easier to find useful content about Forex than right now. For instance, AMarkets and other brokers add special educational sections to their websites. And then update them with new, useful information on a regular basis.
In conclusion, we’d like you to remember the simple rule. You may choose a great trading system, learn to control your emotions, but without any money management rules, you will hardly ever become a serious player in the Forex market. Learn from the mistakes of other traders and try to avoid making new mistakes!