Money Management - A Forex Trader 'Must Have'!

by Martin Hayne
Money Management - what's that? If this is your response to the title of this article, then either STOP trading forex until you have learnt about it or, if you are new, do not start yet! The chances are, if you trade without any Money Management rules, you will lose your capital investment faster than the time it takes to read this article!
Forex is a leveraged product, and if you over-leverage yourself, the truth is you could be staring at a blown account in no time at all!

Therefore, it should go without saying that disciplined Money Management is an important key to not just succeeding, but surviving in Forex trading. Sadly, the temptation of riches can wreak havoc with even the most disciplined people out there! In fact, the determination to succeed and be wealthy may just be the one thing that causes a person to relax their own Money Management rules! 'Speed up the path to the intended destination' will be the justification in their mind!

I know it, because I personally fell foul of just that! So certain that the trade I was going to put on could go in only one direction, I calculated that if I increased my trade size for this particular trade, I could then go on and move up legitimately to a larger trade size for all future trades (by legitimately, I mean according to my Money Management rules). Brilliant! I'm sure this is the type of risk these successful guys take every now and again. After all, you have to take bigger risks sometimes if you want to make it! Well, I'm pretty sure I don't have to tell you what happened next!!

So, here I was, now in a position where I now had to decrease the size of my future trades, to account for the huge hit I had just taken on that one trade. And not only that, to make matters worse, I exited the trade early because I did not want to take the 'full hit' of it reaching my pre-determined Stop Loss!

Yep! You've probably got the next bit too! The trade didn't make it to my intended Stop Loss, and actually would have been a successful trade if I had followed the rules of my strategy! I had just gone down the ladder several rungs in a 'calculated' attempt to move myself up a few rungs. It would now take several weeks of SUCCESSFUL trading to get back to the trade size I had been taking that day!

So, the first thing I did that day to cause such a hole in my account was throw away my Money Management rules. However, that wasn't all that followed! Through just that one act, I lost all sense of discipline, and also didn't follow my trade strategy. By exiting early, I hadn't given the trade a chance to succeed according to my entry and exit rules for that trade. Now, had I adhered to my money management rules, and applied my normal trade size, I would not have been concerned by the trade potentially hitting my Stop Loss, and therefore would have remained in the trade, and been in a position to record a successful outcome, and not a rather large losing one!

I tell this story not for entertainment value, but to share a lesson on how disciplined you have to be at all times in Forex Trading. My discipline here had succumbed to the emotions of greed and fear, and I paid dearly for it. What I'm telling you here is, if you allow just one area of your trading to 'relax' against your predetermined Trading Rules, no matter how valid you think your reasons are, there is a very high probability you will pay the price. You will likely need to break other rules too.

I would ask you to think about this....Your Trading Plan will have been created while in an environment of calm and rational thinking, based on information, knowledge and facts. When you are trading Forex, the environment is neither calm nor rational, and the only thing that can keep you trading calmly and rationally, is to be disciplined enough to follow the rules of your Trading Plan - and in that, Money Management will be clearly defined.

Your adherence to your Money Management rules, and the power of compounding will help move the odds of reaching your trading goals in your favour!

Remember that!..