Monday, April 20, 2009

Trading Forex Without A Money Management Plan?

It can be very alluring to take your credit card out of your wallet in order to take advantage of a great trade opportunity in your top Forex trading strategy. However, prior to taking that credit card out, reflect that without sensible money management you could empty your account faster than you realize.

No form of investment is a guaranteed money maker and Forex is not an exception. In fact due to the quantity of leverage available to traders and investors in the Forex market, greed can quickly take over and all commonsense is thrown out the window. Experienced investors and traders realize that many of their trades, even up to half of their trades, will lose money. The reason why they are successful is that they have a good money management plan so when they do lose it doesn't empty their account.

In any Forex trading strategy, there will be a drawdown. The trouble is, we don't know when the drawdown will begin. If a Forex trading strategy proves it is 80% successful, that means approximately 20 out of every 100 trades will not be successful. If those 20 trades happened all in a row (yes, it does happen!) your account could be completely wiped out if you aren't using sensible money management and you wouldn't be able to keep trading the strategy for the following 80 potentially good trades.

Some aggressive Forex traders claim that the only way to accumulate massive profits fast is to risk more of your capital. While this may be true, it's also the fastest way to lose all your capital and should really be thought of as gambling. There are a lot of stories around about those that made their first million trading Forex and then lost it. The more successful Forex traders and investors did not get rich quick, they took a slow and steady attitude and learnt to make money trading Forex for the long-term.

An experienced Forex trader only risks a low percentage of their investment capital on each trade. The profits will be smaller than those of the aggressive trader, but when the drawdown hits, the Forex trader practising sensible money management will be better prepared to weather the storm.

Of course, building up capital slowly isn't an exciting strategy. But, you're in the Forex market to generate consistent profits, not for the excitement. If you're not using sensible money management when investing and trading the Forex market, you are essentially gambling. Even professionals that earn a living playing poker and other casino games use some sort of money management strategy. They realize that they can't win every single tournament or game they enter, so they only risk a low amount of their bankroll on each one. This allows them to recover much more quickly when a losing run hits.

In conclusion, don't allow the promise of making money fast let all commonsense be dismissed. Trading Forex is not a way to get rich fast, it's an investment option that can make steady profits for those who practise sensible money management.

No comments:

Post a Comment