Once youve managed to crack your own tendencies to suffer considerable losses due to bad and impulsive trades, letting emotions stay in the way of good decision-making, and after youve learned the importance of discipline and youve managed to improve in the right direction, there is no time to lose – its time for the next step. If youve created a plan and started following it without any significant deviations, then its time to do something even more important – learn how to manage your money.
Money management in Forex trading is a simple concept to grasp, but its really difficult to apply if you havent gone through the other levels before that. Money management will help you manage your money in such a way that even when you end up losing, you wont be losing as much many traders with poor money management skills do.
Money Management Examples
Lets examine two examples to demonstrate the importance of money management. We have two hypothetical traders. Both of them have the same abilities in the analytics department. They have both read all the required literature and have a few trades under their belts. They have similar capital to work with and are in the same market niche. The only difference is that one of them hasnt realized the importance of the psychological aspect of trading which is why hes not disciplined, hes still lead by his emotions and even though he has some idea of how to manage his money, he doesnt have concrete rules. The other one, however, has worked long and hard in order to improve his trading mentality because he realizes this is what he has to do before he can improve his capital.
So, after applying their technical analysis skills and studying various charts, noticing patterns and indicators, they both come to the conclusion that an assets price is in an uptrend. They both decide to purchase stocks. However, the first one purchases USD 5000 worth of stocks and the other one, following his money management principles, he only buys USD 500 worth of stocks. All of a sudden, as sometimes these things happen in the market environment, the price takes a dip. Not only that, but there is also a trend reversal caused by new light shed on the company both traders purchased stocks from.
What happens is the first trader suffers considerable losses (about 10 times more than the second one). In this scenario, you would want to be in the shoes of the second trader, I guarantee it. Of course, this sounds like a highly improbable scenario, but you will be surprised at how often it happens. Nothing is sure in this game, thats why you cant afford to pour too much capital in a single trade hoping for huge gains. Thats not how this system works. Sure, you might get lucky, but if you trade this way, its more like gambling than investing.
But how can you best manage your money? There is no single answer to this question. The only constant is that you should never use a large portion of your capital in a single trading, hoping that you will hit it big. This is a mistake many traders make when theyre lead by greed and trying to get rich quick. Sorry to disappoint you, but it doesnt work this way. You need rules, discipline and patience if you hope to make it as a trader.
Two Percent Rul
There is a very good rule many successful traders use. Its called the “two percent rule”. The “two percent rule” is a fancy way of saying that you should never use more than 2% of your entire capital on a single trade, no matter how sure you think it is. This is a way to minimize the risks. Should you lose, you wont lose as much, but sadly, the same goes for profiting. This rule only works if you have a suitable and stable strategy.
If you lose on most of your trades, this money management technique will definitely not save you, but then again – nothing will. If you lose most of the time, the only way to break even is to win your bigger trades. But this again increases the risks of losing bigger sums of money on unsure trades. The way to mitigate this is to use 2% only on trades where you are have more than a 50% to profit and use 1% on the rest. This way you have the chance of winning more than you lose. Of course, in the end of the day nothing in trading is sure, but responsible money management will help you stay in the game for a lot longer than the traders who simply “follow hunches”.
Planning & Staying Disciplined
Learning to control your emotions is the first step to becoming a successful trader. If you want to be a winner in merciless field, then you have to become disciplined. Discipline is paramount for successful trading and will definitely help you out with controlling those pesky emotions of yours when they want to take a crack at your profits for the day, week or even the month. Therefore, discipline is closely related to controlling your emotions but expands on that point. Its more than simply saying “no” to your impulses. It requires your complete focus and hard work if you can even hope of becoming good.
Remember that trading rewards not those who work hard, but those who work smart. You might be making hundreds of trades a day and still end up losing money (even though this is “hard work”) and you can win a lot with just a few smart moves. Discipline will not only help you overcome impulses that can lead to heavy losses, but it will also help you get better at what you do, because remember – there is always a room for improvement.
So how do we begin? Weve already talked about how difficult, yet important it is to control your emotions. Weve touched on subjects like fear, greed and impulsively trying to recoup losses right away. Discipline will help you prevent all that, but will also do so much more. Self-control is but the first step of becoming truly disciplined.
Self-Control and Becoming Disciplined
The difference between learning self-control and becoming disciplined is simple – self-control is about preventing yourself from doing something that might harm your profits. Discipline is about learning what to do in order to improve your profits and yourself. If you want to become a better trader (and if you want to make some real money out of it, you have to want it) then you will not only have to improve seriously, but you will also have to learn to do things you might not really want to do.
One such activity you might not want to be doing, but will definitely have to, is educating yourself. Youre reading our site, so thats a good sign that you want to improve. If youve read the technical analysis section, this is even better. But dont let yourself fall into the mental trap that you know enough that there will be nothing to improve on. You need to meticulously read every article and learn every tutorial you, even when youre already making good money from your trades. You need to diligently follow each and every chart and look for patterns. You have analyze your past trades – both successes and failures, and see what went right/wrong. You cant accomplish all of this if youre happy with you get. Think big. Its good to be confident, but you also need to strive to improve yourself. This is not just about trading – this is how you win at life.
The road to discipline is a tough one. But its going to become easier once you master your emotions and you start seeing trading as what it is – your job. It may not be a job you go to from 9 to 5, but its your job nonetheless. This is where your money is coming from. In fact, the fact that you dont have a boss telling what and when to do should work as a motivator – youre free. Dont fail because the freedom will disappear. Hold on to it – improve, improve, improve.
Improving, studying, analyzing – all of this is hard work. It may not be backbreaking labor, but in a sense its even worse because it puts a strain on your psyche. This where being disciplined comes into play once more. It will allow you to not only create a trading plan to stick to, but also a study plan which means that you will be able to take the rest you so much deserve. Finding a good balance in your life is notoriously hard, but its worth it. We are warning you that learning the technical part of this guide will be much easier than establishing beneficial habits and learning how to control your impulses. But should you succeed, you will see that it was absolutely worth it.
Once you establish a good level of discipline, the plans will follow. You will learn how to plan ahead and how to handle your money. The most important part of any plan is sticking to it, though, so before you can keep a good level of self-control and discipline, you shouldnt be making big plans. If you do, this might backfire. Not following your plans might simply cause you to think that its too difficult and give up. Its good to think big, you also need to be aware of your level. Start with something small and expand. The big plans, trading strategies and good money management will come by itself later on.