Thursday, January 1, 2009

A Forex Trading Tutorial - How to Avoid the Mistakes I Made - Bad Money Management

This article is a Forex trading tutorial and one of five that address the critical mistakes that traders often make. The biggest mistake that you can make trading Forex is ignoring money management. You heard the news...95% of traders fail to make money in the first year because they blow through their account. How does one blow through an account so fast (and this is assuming that an account was adequately capitalized)? You will lose your account by risking too much money on individual trades.

The idea is to make money by not losing too much. Are you going to lose money trading? Yes you will but you will come out ahead if you keep enough money in your account to trade tomorrow. One of the most common mistakes that traders make is risking the whole bank roll on a trade. Studies done on the market suggest that traders should never risk more than 2% of an account on any one trade. Smart traders will risk even less on any one trade, as little as 1/4 to 1%. The concept behind this rule is that no one trade will kill your account. Will the process of making money be slower because you are of risking smaller amounts? The answer is yes but you won't have to sell your house to meet a margin call either.

There is another benefit to trading small lot sizes. You can sleep at night and not worry. I have made trades that have turned bad and stayed in too long with the hopes of making it back up if it turns around. This is a huge mistake because you have then turned a small loss into a very bad investment losing money you cannot afford.

Always ask yourself; How much money can I risk on this trade? This is very sound risk control and should become your mantra for trading the Forex market. Warren Buffet said "Rule number one of investing is never lose money. Rule number two is never forget rule number 1". Very wise advice.

All of the good traders (traders that are consistently profitable) have different strategies for making money. It seems simple but what they all agree on is that the single most important aspect of trading is risk control. Imprint this rule on your forehead....if you want to make money trading you must manage risk with disciplined money management rules. So whatever system you chose to use make sure that it risk control built in.

Did you know that there is a easy way to alleviate all of the mistakes above? Can your trading afford to try and stay in business and continue to make these same monumental errors? I think not....a automated trading system can strengthen and amplify your trading results. Click here and find out how you can improve your trading results tenfold with the right strategy.

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