Copyright (c) 2009 Jay Meisler
It is hard enough to make money trading but it seems a shame to reduce your odds through poor money management. One of the attractions of retail forex trading is the ability to leverage your account to increase potential profits. This often acts as a lure for new traders. However, the reverse is also true when you get the market wrong and this can be disastrous when trading with limited capital. This may be why some estimates range as high as 80%, some place it at 95% of retail forex traders who lose money. I have no clue what the proper percentage is but I do know that a common pitfall that plagues retail traders, especially new ones, can be avoided through the use of proper money management. The aim of this article is not to give a tutorial on money management but to emphasize how important it is for successful trading.
As a co-founder of a leading forex discussion site and someone who has been trading the forex market for over 30 years, I have seen not only "newbie"traders but some experienced once blow their accounts. It is very frustrating to see traders lose all their trading capital due to a lack of proper risk management that could have been avoided. This does not mean these traders would be successful otherwise but at least they would have had a chance. The culprit is often the inability to utilize proper money management, such as a combination of too high leverage, lack of or improper stops, doubling or tripling up a losing position and hope of a recovery replacing sound analysis once a position goes the wrong way.
Many new forex traders enter this market never having traded with leverage. They see promotions of trading with 100:1, 200:1 and even 400:1. They see the lure of quick profits using high leverage. They trade a forex practice account and it looks easy. Then they open a real account and find it is a lot different than 'paper' trading. Leverage works great when a position goes your way as it magnifies your profits. On the other side, it can be devastating to one's (limited) capital if proper risk management is not employed. As an example, using 400:1 leverage, a eur/usd position only has to move '% (.0035 or 35 pips) to see the account wiped out.
During this current global financial crisis, financial firms with billions of dollars of capital have been wiped out by over leveraging and lack of proper risk management controls. You are probably asking, so what chance does a 'newbie' trader have in this market? The answer is you can control your own risk parameters. You can follow proper money management principles.
The following is from an article in the "Tips from the Pros" section of the Learning Center on www.global-view.com, which along with its forex forum and other resources, is a good to visit to learn about all aspects of forex trading, including proper money management and ask questions about any subject.
Jay Meisler, a partner in Global-View.com, says one problem of trading with too-high leverage is that one piece of surprise news can wipe out one's capital. 'Those who treat forex trading as if they were in a casino will see the same long-term results as when they go to Las Vegas, he says adding: 'If you treat forex trading like a business, including proper money management, you have a better chance of success.' Newsweek International, March 15, 2004
Think about it. If you were running a business would you risk the entire firm's capital on one roll of the dice? Trading is your business. Treat it as such. Employ proper money management. Don't succumb to the lure of excessive leverage, which is 'fool's gold.' Live to trade another day.
I cannot emphasize this enough.
Jay Meisler is a co-founder of Global-View.com, the leading forex discussion site for more than a decade and where traders from around the globe come for the latest breaking news, flows, rumors and trading ideas => http://www.global-view.com