Forex Money Management

Before we get into the actual tactics of trading the Forex markets we have to cover what

I consider the single most important element of trading: money management.

We can be the best trader in the business, but if we let our losses exceed our gains we’ll end up being a loser!

I often compare trading to gambling. If you’ve read my previous eBook, “$$500 Dollars per Trade,” you know what I’m talking about.

It’s called “gambler’s mentality.” If you gamble and make money you believe you can make more if you just keep betting more and more. Some gamblers even feel guilty about winning so much in such a short time – but that’s another story.

When you gamble at a casino the odds are pretty much even. Less than one percent at the dice table. That means you should lose only one dollar for every one hundred wagered.

So why is it 97% of the people go home broke? Do I have to answer that, or do you know the answer already.

It’s called greed.

And that’s what you must overcome if you are going to be a successful trader.

Here’s what happens if you’ve been making money and start to lose (which is inevitable). First, you lose control. You bet bigger and bigger as you lose. You toss aside whatever strategy was making money for you when you were winning. You start “chasing” your money.

Any idea of making a profit is abandoned. Your only thought is getting back even.

Until, of course, it’s time to go home.

And that’s what this chapter and the Forex markets are all about. You’re already home and the markets are still open. Forex is a 24 hour casino, right on your PC! And, unlike internet gambling, it’s legal.

Nevertheless you must accept the fact there are millions of traders out there – like a vast casino – that all have the same idea, “Make a bundle of money, and go home.”

Well, we’re going to rise above that “herd mentality.” Just like a cattle stampede you’ve seen in the movies. Do you want to be a part of that?

I didn’t think so.

So, here’s how we handle our money, plain and simple.

Let’s go back to my pizza trade. I made $10 using about five hundred dollars. Let’s see. . that’s two percent on my money ($10 divided by 500 . . duh!).

But what if I had lost $10 dollars? That’s two percent also. Would you agree that’s a reasonable amount to wager to make two percent? So, if we can just keep our losses at two percent we can maintain control of our money.

But now let’s say we actually had $1,000 dollars in our account. Our profit and loss would be just one percent. Are you starting to get the picture? We don’t have to “bet the farm” to make two percent. We just have to do the math!

And the Forex markets allow us to do that. We know exactly where to get in and where to get out to make or lose two percent. And many times we’ll lose much less than two percent – often just breaking even – which is fine with us.

Remember, our original goal is to make five percent per day. And that brings us to the hard part. What do we do when we’ve made five percent?

We quit for the day. “But why quit when we’re making money?” you might ask.

Let me ask you a simple question. What are you going to do if your very next trade is a loser? Are you going to quit then? Once again: I don’t think so!

Now can you see what I’m getting at. Our overall goal is to double our money every fifteen days. So, maybe it takes eighteen or nineteen because we had some bad days.

What’s a “bad” day? It’s when we lose ten percent of our money. That’s $50 on five hundred. Once again we quit for the day if our losses total ten percent of what we started the day with.

Some traders will argue that’s excessive. But, as we’ll see, our strategy is so strong that it’s rare to have a “bad” day.

And the next day we start out like nothing happened. We have a fresh mind and attitude and pretty much know our strategy will overcome our losses.

We’re not trying to “get our money back.” We’re not beating ourselves up because we had a losing day. We’re in control!

Now, let’s recap all this.

1. We never risk more than 2% on any one trade.
2. We quit for the day if we’ve made five percent on our money.
3. We quit for the day if we’ve lost ten percent.
4. We also quit at 3:00 PM Eastern no matter where we are simply

because the markets slow down around that time.

If you start your trading day like I do at 8:30 AM Eastern (5:30 AM Pacific) – since I’m retired – I’m usually done within 2-3 hours. Often in less than an hour!

If you have a day job you might trade after dinner instead of watching TV. Of course when and if you make a go of this business you can quit your day job!

Now, here’s a couple tips to help you maintain your discipline.

First, to keep you from going back to the trading table after you’ve quit, try using this website: http://www.webjillion.com/index.php It’s called Temptation Blocker, and once it’s activated it won’t let you go back to any program you’ve selected for whatever time you input. (You can override it but it takes an effort.)