A Typical Trader’s Story – Part 2: Money Management

Filed under: Learn Forex Trading |

Continuing on from last week’s story, after a painful experience or two, I have now managed to always create stop losses and stick to them no matter what. And you know what? No more of those painful experiences. Those big losses used to be like shark bites – almost killing me and my trading bank. However, there are other dangers in the murky waters of the financial markets that need to be considered. Stop losses eradicate those big shark bites, which take out large chunks of your trading capital. But your bank can also be diminished by a long series of smaller, piranha-like bites. This is why we need to have good money management skills. I have written several articles about money management on this website already, but it is so important that I keep coming back to it and trying to bang the idea home. If you are risking too much on each trade, your trading capital could be in just as much danger as it would be from that big shark bite. Let me explain…

 

Some new traders think that their trading capital is so small, say $500, that they need to risk more money just to get in the game. So, they might be risking say 10% or $50 on each trade. This is a very high-risk level and it would only take a bad run of trades to wipe out your bank completely. Regardless of the size of your bank, you should never really risk more than 2% of your bank on one trade, with just 1% being more reasonable. Some more conservative and more experienced traders may only risk as little as 0.5% on a trade, so that it would take a hell of a lot of those piranha bites to wipe out their trading capital  – two hundred in fact! Let’s face it; even if you put trades on at random, you are not going to have two hundred bad trades in a row. So this is why we must exercise good money management.

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