There are many Forex traders and thus there are many things that they feel are important to do to manage their money.  We have found that the trend is the most important requirement to make money using technical analysis.  The tools used to measure the trend are not perfect, yet very helpful…so a trader will need to be aware of the risk in trading and protect themselves against sudden turns in the market.

When a trader decides to enter a trade he must also decide when he is going to exit the trade.  The trader needs to decide when to exit the trade if it is positive and if the trade turns negative.  Making the decision at which price to set your stop loss before entering a trade is a way of protecting against large losses.  If the stop loss is going to be far enough away from the entry price to make the trader feel uncomfortable then there are two things that can be done:

1. Trade with a smaller lot size.

2. Do not take the trade at all.  It is best to be in control of your emotions and your investment capital before you enter a trade.

One of the greatest advantages when entering a trade is that an exit point can be established at a point that if reached the trader knows that something is wrong, either with his research or the market behavior.   This is one way that the risk or loss can be determined right in the beginning of the trade.   Because the risk can be determined, money management principles can be applied that will lower the chance of loss.  By trading in the direction of the four hour trend you will also lower the risk in trading.  Being patient and waiting for the market to give an entrance signal is another way of limiting risk and managing your account balance.

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We have seen over the years traders will trade without a stop loss for fear of a small loss.  When the market turns against them they let it run in the wrong direction rather than getting into the trade and trade with the move.  Their total focus is set on wishing the market would turn and come back for them.  Now the trade is several hundred pips against them and they can’t take it any longer so they close the trade and take a big loss and feel good that they did not lose more.

We all have to realize that a loss in trading is part of trading.  We need to put the advantage in our favor so we will win more than we lose and not fall in love with a trade that is losing and let it run.  When we take a trade we need to know where our stop loss is going to be then let the market tell us when to get out.

Once we have profit in a trade we need to concentrate on protecting the profit.  So it is best to protect profit rather than hope a loss will get smaller. The first loss is always the smallest and will give you better vision for the next trade.

Principles For Money Management

When you open your live account decide on the amount of money you can and will lose before you stop trading and go back to learning. Better yet, learn to trade first. Do not decide to stay in the market until your first nest egg is gone. Experience shows that many who have been at it over a long period of time end up making money.  Once you learn how to trade, large sums of money can and are made by those who have taken the time to learn and develop proper trading skills.

It is a wise practice to take time to learn to trade before trading real money. The methods we suggest to practice and learn are to do Simulated trading, Demo trading, and Visualization trading. 

Preservation of capital is one of the first lessons that should be learned.  Trading is not a get rich quick deal.  The market doesn’t care whether you make money or not.  There will be losses and wins in trading; learning to manage each of these situations is part of trading.

We have seen traders, or should I say people trying to act like a traders, put two or three hundred thousand dollars in a trading account, run the account up over three million dollars then lose it all.  They were lucky in the beginning, caught a trend and placed hundreds of lots on each trade.  As the account grew they became more like gamblers rather than traders.  A trade would be up by a hundred thousand dollars, and rather than take the profit or place a protect profit (stop loss) they would just let it turn on them and take a loss.  It they had taken time to learn how to trade they would still have their initial deposit and a good return on the money put into the market.

The jump start strategy is a good basic starting point to learn how and when to get into a trade and make a little bit of money while developing trading skills. First learn basic skills then learn how to use tools to capitalize on making money.

Some people say you should not risk any more than 2 percent of your account on any one trade, while others say between 3-4% is max. One thing is for sure, you should be conservative. We feel you should never risk any more than 5 percent of your account on any one trade. We also recommend that you start out small then add on to the trade once you see it is moving in a strong trend. Now let me clarify why I say 5 percent. Most of the time you should start out around the 1-2 percent range then add-on when the trade goes in the direction of the trend. When the small initial order is profitable then move the stop loss so the trade is at a break even or even a little profitable, this way there will not be a loss on the trade.

Now look for the add on signals. At this time the trade is showing the true trend and it is easier to add on to the trade with greater confidence and trading 5 percent of the account is not an issue. It is possible to trade much more than 5 percent of the account and only have 1 or 2 percent at risk for the rest is protected by your stop losses in a profitable position. Until proper preparation and practice have taken place, do not trade real money.

You should always know where your stop loss is going to be placed before you enter a trade. Once the trade moves in your direction then move the stop loss to a point that is at least break even or where you have a slight profit. Know what your exit signals are and close your positions when the signals are given. Do not try to get more than the market is going to give.

You need to take care of your emotions. If you have a loss and do not know how to handle it then you will become afraid to trade. So set an amount that you can afford to lose both emotionally and financially. Once you have reached that limit then you should do some more simulated trading to sharpen your skill on spotting your entry and exit signals. Once you feel good about that then move on to demo trading. When you are ready to trade live again start out small and grow from there.

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