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One of the cardinal rules of Forex trading is to keep your losses small. With small Forex trading losses, you can outlast those times the market moves against you, and be well positioned for when the trend turns around.
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The proven method to keeping your losses small is to set your maximum loss before you even open a Forex trading position.
The maximum loss is the greatest amount of capital that you are comfortable losing on any one trade.
With your maximum loss set as a small percentage of your Forex trading float, a string of losses won`t stop you from trading.
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Unlike the 95% of Forex traders out there who lose money because they haven`t applied good money management rules to their Forex trading system, you will be far down the road to success with this money management rule.
What happens if you don`t set a maximum loss? Let`s look at an example. If I had a Forex trading float of $1000, and I began trading with $100 a trade, it would be reasonable to experience three losses in a row. This would reduce my Forex trading capital to $700. What do you think those 95% of traders say at this time? They would reason, "Well, I`ve already had three losses in a row. So I`m really due for a win now."
They would decide they`re going to bet $300 on the next trade because they think they have a higher chance of winning.
If that trader did bet $300 dollars on the next trade because they thought they were going to win, their capital could be reduced to $400 dollars. Their chances of making money now are very slim. They would need to make 150% on their next trade just to break even. If they had set their maximum loss, and stuck to that decision, they would not be in this position.
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Here`s a perfect illustration why most people lose money in the Forex trading market.
Let`s start out with another $1,000 float, and begin our Forex trading with $250. After only three losses in a row, we`ve lost $750, and our capital has been reduced to $250.
Effectively, we must make 300% return on the next trade and that will allow us to break even.
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In both of these cases, the reason for failure was because the trader risked too much, and didn`t apply good money management. Remember, the goal here is to keep our losses as small as possible while also making sure that we open a large enough position to capitalize on profits. With your money management rules in place, in your Forex trading system, you will always be able to do this.
by David Jenyns
http://www.earnforex.com
http://earnforex.blogspot.com
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Filed under Basics, Strategy, Tips, Forex Trading Tips by wizardoftrading.
| Anyone who is serious about trading needs to have a Forex Trading System that is tailored to them, but there is no reason to start constructing your Forex trading system from scratch. |
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Why try and reinvent the wheel when you can benefit from other traders years of experience and borrow your trading system's ideas and concepts?
It's easy to do, and there are some pretty good Forex trading systems out there for you to work with.
Some of them are free and some are very expensive, but the price tags don't always reflect the actual value of the Forex trading systems.
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| But, many of these systems won't work for you, and I am not talking about out-right dishonesty here, which can be a big problem when trading. What I am talking about is your ability to effectively trade with the system that you may be considering using or buying.You need to use a system that matches your life style and personality. If you have a day job (not trading), a Forex Trading System that requires you to stare at a screen all day wouldn't be appropriate. You would be distracted at work and miss the opportunities to make money, or even worse, you will not close a trade effectively and could lose money.Some Forex trading systems have a potential to lose 20, 30 or 40% of your money before they are profitable. Can you handle a system that can drop your trading capital to half before making money? Or, are you prepared to have a string of 8 to 10 loses in a row before you have a winning trade? Some of the best traders in the world lose money on more than 50% of their trades. These are all important points to consider when you are creating your Forex Trading System. Choose aspects of the different systems that are out there that fit your trading style best, and then build your Forex trading system.An excellent trading method, which was made famous by Richard Dennis and William Eckhardt and is sometimes referred to as Turtle Trading, is one of the best Forex trading systems that I know of. They get returns in excess of 20 to 100% per year using this system. But, could most traders trade their system? Not a chance! Dennis and Eckhardt also loose on over 60% of their trades.Once you know what sort of Forex Trading System will work best for you, look at the components that make it work. |
| Face it; if you are a new, or even a fairly serious, trader how likely are you to come up with a totally new concept? There are some very smart and wealthy traders out there. Why not use their ideas.Consider Dennis and Eckhardt's turtle trading, their system is based on a "breakout" method. I know most traders could not trade using their exact method, but they could take parts of it, such as the breakouts, to confirm a trend. |
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You can also use other Forex trading systems to give you an outline of what parts a system has to have for it to make money.
All great Forex trading systems have these three basics:
1. Entry Rules,
2. Money Management Rules and
3. Exit Rules.
Study and learn from the Forex trading systems out there, borrow their concepts, and steal their ideas. It will put you on the track to the system that will make you a successful trader.
by David Jenyns
http://www.earnforex.com
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Filed under Strategy, Tips, Systems, Trading System by wizardoftrading.
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