Money Management Principles (Part II). Useful Info to Keep in Mind

Discover a revolutionary new forex robot.You must have read Part I of the Money Management Rules article. Failure in investing comes in two forms; Failure to maintain your principle and failure to effectively grow your principle. If you want to become a successful trader, than you need to learn how to grow your principle in the long term.Try Netpicks Forex Signal Service.

In case you risk too much, you are going to lose a large portion of your account. You will risk more and try to recover the lost amount. You will lose all your account. There is another form of failure that you should know. You are able to grow your account 20% every year. On the surface, you may appear to be a successful investor. But, if you had made a good money management plan, you could have made 40% in a year. So what do you say was it a success or failure?

How much is truly at risk in a single trade? Many traders misunderstand this. Suppose you have a $10,000 account. You buy one lot of EUR/USD that is $100,000. Your broker will set aside $1000 in your account as a margin. So how much of your money is at risk? Many would say only $1000. They are wrong. You have now only $9,000 to trade. So your risk is $9,000. You could lose up to this much before you receive a margin call from your broker.

A margin call is an order when your forex broker automatically takes you out of the trade once you have lost all but the last $1000. Once you get the margin call, it means you are out of the trade and have lost $9,000 in your trading. How could you lose $9,000 in a single trade?

Each pip on a EUR/USD contract will cost $10. So you need to lose 900 pips (900*10=9000) in order to lose $9,000. Many would say what about the stop loss. You are right! You don’t need to risk your whole account on a single trade and trade without a stop loss. You can use stop losses to protect your position in case the trade goes wrong. You could put a stop loss at 100 pips losing $1000 only. You could put a 50 pips stop loss losing only $500.

No matter where you set the stop loss, the amount of money that you set aside with your broker as margin does not tell you anything about the risk unless you plan to get a margin call. Understand these common money management pitfalls. Until and unless, you do not develop your own money management rules, you will most likely slip into one or more of these pitfalls.

Investors who enjoy the greatest amount of success in their trading are those who have clearly established money management rules that govern their trading. Those rules are; 1) Live to trade another day, 2) Knowing how much to risk and 3) Knowing how to determine the trade size. You should read Part III of this article where I explain these three rules in more detail.

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