Avoid Bad Risk Management in Forex Trading
You can have one of the best forex system in the world but with bad risk management, it will only fail. Perhaps, you might as well get your account blown out with that system in a couple of trades. Was the system bad? Not at all. It was your bad risk management practices that made it fail.
Many new traders think that they can make a million dollar in their very first month. Nothing can be more dangerous than this. In an attempt to make a million dollars, they over trade and take too much risk in their trades. Just a few losing trades and they are out of the game with their account blown.
Practicing bad risk management with a very forex system will only produce bad results. You just need a couple of losing trades in a row with your bad risk management strategies to get your account blown out.
What is more important for you? Capital preservation or capital appreciation? Of course capital preservation. Learn to survive the market and trade another day. Suppose, your system makes only 10% return per month with a risk of only 1%. Is it better or is this system better that gives a 50% return per month with a risk of 10%. Naturally the first one is a better system. Let me explain.
Suppose, you have a coin and you have $100. Your friend want to bet $10 dollars for every flip of the coin. You and he agree to make 1000 flips. Ideally if you win all the 1000 flips, you will be making $10,000. But if you lose all the 1000 flips, you lose $10,o00. But you have only $100 in your pocket. So, how much maximum to bet on one single flip of the coin?
Betting $10 on each coin flip means if you lose just 10 coin flips, you lost your $100. This means your chance of losing with $10 per flip is a whopping 90%. But suppose, you ask your friend to reduce the bet to only $1 per flip? Will it work?
Now, what are your chances of losing all your $100? Only 5%. You see, you need 100 flips in a row to lose $100. This makes your risk of losing only 5%. This is exactly how you need to take the game of trading.
The success or failure of any forex system depends on the risk management rules that you apply with it. If you use too much risk, you lose pretty soon. On the other hand, if you use low risk, you might not make a high return but your chance of facing ruin also reduces drastically.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Read this Tom Strignano Money Management Professional Trading Tips FREE Report. Download this award winning Forex Trading System that made 1,306.50% in one month FREE and watch the banned system video.
by: Ahmad Hassam
Total views: 12
Word Count: 437
Date: Thu, 24 Feb 2011
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