If one assigns two amateur trading with all the best tools and lets them trade on opposite sides on a trade, it is very likely that they will end up losing money. Then, do the same thing using two seasoned traders – they will definitely make money. The questions that would come up are:
Money Management is one aspect that many traders neglect to practice. It is a time consuming activity as they have to constantly monitor their positions to keep track of all the necessary losses that come with the territory. If one wants to succeed in the business, a few losses are crucial for some important lessons. It is very important for couple of reasons:
When a person is ready to approach money management seriously and has the requisite capital set aside in an account, there are 4 stops that can be used in trading.
The simplest tool available. A trader will put a predetermined account (recommended amount is 2% of total amount available) on trade. The upper limit would be 5% - this is considered aggressive, as if you bet ten times at the 5% limit, you end up losing 50% of your money.
Technical analysis tools generate many variations for stops and this is driven by price. An example is the swing high/low point. A trader with a 10,000 dollar account using this method could sell one small lot and risk 150 points – translating to 1.5% of the account balance.
Volatility and not price are used to set risk parameters. In a highly volatile environment when prices have big swings, the trader will need to adapt to market conditions and make a call. Bollinger Bands are a tool used for this parameter. Total risk is better held at 2% of account to keep cumulative risk low.
This is the most unusual money strategy of all. It can be effective if it is used well. It is a known fact that Forex markets operate 24/7. Hence traders can liquidate their positions as soon as they make a margin call. This controlled used of capital will help the trader to trade multiple times and not lose all his capital with one trade.
As one can see, money management should be varied and flexible and every trader must practice some form or the other to succeed. This depends on your personality and you can learn as you go along.