Have you asked yourself what strategy do you need to learn in order to become a successful trader? Have you tried to learn a lot of analyzing tools and indicators? Trend, support, resistance, Fibonacci, Gann, MACD, Moving Average, Bolinger bands etc. And in the end of the day you loose your capital… What is the problem? You analysis is over 50% successful however you loose money.
The answer is simple – Money management! In my opinion it is very easy to analyze the market over 50% successful! The hard part is to stay calm, to be patient to control your greed and emotions.
Have you been in a position to know that the market is going up, to think again and again “Why shouldn’t I put more money in this position? I am 100% sure it will go up!”? And then you decide to keep it the normal amount and… the market is going up and you regret your decision with the feeling that you have missed a good profit. And the next time when you are sure it will go up you open a huge position with high leverage(you are 100% sure it will go up) and… this time it goes down… and you loose a lot of money.
So what is the secret? NEVER risk more than 1-2% of your capital!
What is your success rate if you open a position with 100 pips take profit and 100 pips stop loss? Generally it is 50/50 which means that in a perfect world if you open 30 positions this month you will have 15 winning and 15 loosing positions and you will pay only the commission to your broker. If you risk 1% of your money you will be able to do it, however if you risk everything you cannot afford to loose on a position more than 2 times in a row.
Now imagine if you develop a little bit in technical analysis and your success is not 50/50 but 60/40, so you have opened 30 positions this month, 18 winning and 12 loosing. Lets say that you are trading with 10000$ – 1 pip= 1$ and leverage 1:1 . You always put your stop loss and take profit levels 100 pips away.
Calculation:
12 loosing positions * 100 pips = 1200 pips on loss
18 winning positions * 100 pips = 1800 pips on profit
30 opened positions * 3 pips spread = 90 pips commission
So 1800-1200-90= 510 pips on profit = 510$ for 1 month
This is 6120$ profit on yearly basis which is 61.2%. I think this is great!
On the other side if you trade on high risk there is a chance to loose your whole capital for 1 hour…
Do you understand now why Money Management is one of the most important things in Forex?
All you need is discipline, self control, and just a little bit knowledge about the Forex market!
I wish I have helped you with this article!
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