Forex Money Management:

This section will be the single most important section of your forex training, which is why we have placed it in as close to the top as we have. No matter what indicators you choose, what time frames you trade, or even what strategy you form for yourself, managing your account and your risk will be the #1 key to whether you become successful or not. For this reason we have created some very simple set of guidelines you must follow and stick to, we call them the 10 Commandments of trading. If you following those rules and sticking to them will result in much better trading and help form a solid foundation to what you will be learning from here on out.

10 Commandments to Trading

While it may seem over-simplified in this form, these 10 Commandments for trading are hard and fast rules, designed to help you and protect you. When you violate one of these commandments, things can get rough. Yet rest assured, financial redemption doesn’t have to be far away. Every time you make a choice in trading remember “there is always another trade and another opportunity” in the markets to make things right.  Whenever there is a time you fall short or start seeing you are not following the 10 commandments, simply stop what you are doing and take a good look at the trades you are in. It is far better to take a temporary loss than to see your losses pile up; getting you into trouble you can’t get out of.

Forex trading itself can seem exciting.  It is one of the only investments out there giving even the smallest investors the opportunity to potentially profit from the market’s volatility in ways that stocks, bonds and commodities can’t come close to. You can make a lot of money from this market in a very short period of time, though nobody should ever be looking for every pip and every market movement.

Despite the excitement of trading, though, the truth is the forex market can be sometimes painful and hard to take. The forex is not going to be a stroll in the park. A better analogy to forex trading would be running a marathon.  A stroll in the park for some may include a few hills, but implies a slow speed and not too much effort – it will generally be pretty easy. A marathon will be much tougher, but also much more rewarding, something you can be pleased with for the rest of your life. You are about to start your training and show how you how to conquer this financial marathon. But remember, not everyone has the ability to run a marathon, even with all the training and encouragement available. One of the things that many forex and investment companies out there erroneously do is let EVERYONE invest. That is a fatal financial error nobody can afford to make.

If any random person with no previous training, equipment, or proper diet, were thrown onto the starting line of a marathon, do you think they will finish? Rather, take that same person on a walk through the park, getting them used to small hills, seeing what shoes they will need, training them little by little so they can see what they are about to bite off. Then get them running a few miles here and there, building their muscles for longer runs later. Once they are all trained and ready to start their run, some will still back down and say, “It’s too hard.” That isn’t failure. They have gained knowledge, are now stronger, and in much better shape than they were before they started.

Those who train and run the marathon of forex trading will not only be stronger, they will be part of a team of other runners who that will help them out, pushing them along and giving them guidance along the way. If a runner sticks to those 10 commandments while making their 26 mile run, keeping their focus, they will reach the finish line. 

On a personal note: I remember watching my sister-in-law run her marathon. I sat there and watched as the people crossed the line. I saw the pain in some and the joyous sense of accomplishment in others as they finished. I remember looking at some and thinking, “How in the world did that person make it?” I remember joking with my brother saying, “I get winded driving 26 miles let alone running 26 miles.”

I walked over to congratulate her on her run, amazed to see what was waiting for them at the finish line. They had massage tables, fruit and drink stands, all sorts of pictures and memorabilia to celebrate the run. Seeing all of that, seeing the look on the faces of those runners, made me want what they had. I wanted that intoxicating sense of accomplishment. Then I remembered one thing very important, something my sister-in-law said to me: Only 40% of running a marathon is the physical training, the other 60% is the mindset you have while running. 

The forex is no different.  What we give you will be the 40% in training you will need to succeed. The other 60% is in your head and heart. We will help you get in shape – we will even run the course with you to give you encouragement along the way. Just keep in mind that the first marathon you complete will only be the start, you will get better and learn more every run you take. Each run will get easier and the mindset will become second nature. Without training you are still only running at 60% - in letter grades a “D”.

Just like running the marathon you must set your pace and stick to it. There will be times when you can push it a little harder and sometimes when you need to back off. In the forex you must decide how much risk on each trade you are willing to accept before you open the trade.  You should never risk more than you can afford to lose – if you start off at a sprint you will surely burn yourself out and a bad mindset will be started right from the beginning. Know our limits; investment in currency exchange is highly speculative.  In most cases it is best to focus on the long-term as an investment as opposed to the short, quick gains. For example, on average during bearish markets stocks may fall 20%, then turn around and climb 35% within the same year. It is important to remember to use the good times to prepare for those losses. Preparing for those losses is a topic we will be discussing at length later in this textbook.

The first Commandment that everyone at every level of investing needs to keep in mind is to know your limits. Set a maximum daily loss limit and also a max loss for each position entered. Before you ever enter a trade, again, know your limits. Know when enough loss is enough and when “take your money and run.” Those limits are set by each individual traders risk tolerance each trader will set those limits; we will talk more about that shortly.

Let’s keep things in perspective while we are trading. There will NEVER be any system or trader that is 100% accurate. If they claim to be, don’t trust their numbers or data – it’s fake or inaccurate to lure you in. The perspective that needs to be learned right from the beginning is where to focus your trading strategy. Typically traders want to win every trade they enter. That would be idea but it’s not going to happen. An alternative to focusing on wins would be to focus on the losses. This may sound odd at first but if the trader focuses on the losses and minimizes them to meet their loss tolerance or loss parameters the wins will follow by default.

Over the years with trading Many times traders and trading systems teach a good strategy is to sell the rallies and buy the dips. This can have its advantages and disadvantages; there will be times for that.  However, traders that consistently average down into losing trade will certainly feel the pain.  Consistently averaging down into losing trades will almost guarantee that you will not succeed in the stock market in both the short or long term. It is almost a sure thing that you will lose everything you have or at least a very large chunk of your capital. Believe it or not, there have been large professional trading firms and asset management groups that have gone belly up and lost everything using this technique of averaging into losing trades or investments. Barings Brothers and Sumitomo Copper are two that come to mind. If this strategy can take out a professional with millions of dollars invested, then it can do the same to you. It has ruined many a small investor as well and totally taken them out of the stock market for life.

that are in bad trades will be tempted to keep adding to the positions, buying or selling additional positions at support or resistance. For some reason this adds a psychological security to the trader that they are in a good position. That leads us to the fourth commandment; which is to remember risk reward ratio is more important than the win ratio.

The markets change day in and day out, just as we humans do. We all have mood swings, we all get stressed, and we all have times where we are on our “A” game. Robots are great for eliminating the “human” factor, but they do not take into consideration the market changing factor. Robots are limited to their programming, meaning they will hit specific levels, ranges, maybe some support or resistance, but since the markets’ trends change so fast, they cannot predict accurately.  Simply put, there are holes in both human and robot plans. As traders, having all the factors in trading that come with the territory, we are going to end up running a trading cycle.

A good majority of Money Management is mindset and discipline in sticking to a specific set of rules. Hopefully by this point you understand that this is not a short term solution to all your financial woes, but rather a start to a new financial beginning or an addition to your current investments. There are other sections listed in the "Education Tips" that will help you with things such as leverage and specifics on mindset.

Enjoy your trading and remember to stick to these Ten Commandments and you will be ok.