Forex Risk Management

Do You Want To Trade For a Living?

I received an email this week from a guy in England. He asked me if he could trade professionally and give up his day job.  Moving from a secure (relatively anyway) job with a set paycheck each month to the uncertainty of professional trading is a hard transition to make. My response to him was that you must have a trading account large enough to so that you can generate a conservative return on your money while still following proper money management rules.

This means you can’t trade for a living with a $10,000 account.  But what you can do is start building up your small trading account so that one day you CAN trade for a living!

The next thing I suggested is that you must have an absolute minimum of 6 months of savings as a safety net. The reason is this; as soon as you need to trade for a living, the increased stress it puts on you to make money to pay your bills tends to cause trading more erratic trading than does trading for passive income.  The way to be successful at trading is not to make it about money but make it about following the rules, your trading method and your setups.  If you do this the money will come. If you think about making it about money first you will always be chasing the money and this will lead to mistakes, frustration and more than likely failure.

Make it about the trading plan and setups, then the results will speak for themselves and the money will follow.

How To Make Money In Forex: Learn How To Take a Forex Trading Loss

Forex Trading losses are part of the deal, since in order to trade we have to risk losing. We have to accept that risk in order to succeed.

You should treat losses as a normal business expenses, after all it’s the money in your account at the end of the month that matters.  A loss never bothers me, I forget it instantly.

You should know where you will exit if the trade wins AND if it loses. A losing trade is an automatic function of your trading plan, so learn from it. You will have a rule in your trading plan about how many consecutive losses you can have before quitting trading for the week. This is an important rule to obey without question.

The following comments about Forex trading losses were made by a “Pit” trader named Peter Crowns on one of the internet’s many Forex forums.  I think you may find them interesting…

In reality much of what I will say has been said, by various people, various times; but maybe not in application to something that works so well…. There will, no doubt, be those who will recognize themselves when this is read. (Also, thanks in advance to Dr. Phil for some coming “get it” remarks.)

Wikipedia, which is becoming the virtual source of most information that is close to trustworthy for us in cyberworld states this under the definition of TRADER:

In finance, a trader is someone who buys and sells financial instruments such as stocks, bonds and derivatives. Traders are either professionals working in a financial institution or a corporation, …. or speculators. They buy and sell financial instruments traded in the stock markets, derivatives markets and commodity markets.

Forex is a derivative market.
Nowhere is there a definition of trader where traders are those people who buy and sell without losses. Losses are an integral part of trading, and those who spend most of their thought processes trying to figure out how to trade with the fewest losses, don’t “get it”. I know that some reading this will think I am over-reacting about the question of losses and loss taking, when in reality no one seems to take the concept of losing regularly as customary.

Until you learn how to lose, you cannot win, long term, as a trader. Take your losses for God’s (and yours and your family’s) sake, and then forget them. Get past them, recognize that they will happen a lot and learn to handle the one thing you are in complete control of. How much risk you take and the size of losses you take. Then the only thing you will be profits.

What a problem!!!

When I started trading in futures you had a fairly good idea (but not perfect by any means) of how much risk you were taking on trades until you came to a day when you put on a trade and there was an air pocket where there was no trade for dozens or 50 or 100 ticks when some big news hit the market and funds gobbled up all the offered contracts. If you were a slow pit guy you “died” that day if you had too much size on. We all have it so good today trading forex.

If you can’t see the advantages you all have and the opportunities to cut your risk to virtually nothing (pennies a pip if you wish), and the right to hold on to your winners almost forever if you want…!
What is everybody’s problem? Don’t you know that only losers get so freaked about having losses???? Losses are just losses. Make sure they are smaller than your winners, in aggregate, and you’re home free. I suppress more frustration at this stupidity than you can imagine. Your mental state of trading is KEY.

I hope you found that as informative as I did. Final thoughts from me; A losing trade can be useful if something is learned from the experience. It is how you deal with a losing trade that will determine your success. Don’t take your losses personally, professional traders have losing trades and (in fact they expect them). If a trade does not work as planned say “that’s interesting,” then find out why and move on.

Forex Trading Psychology:Take Responsibility For Your Forex Trades

“He who blames others has a long way to go on his journey. He who blames himself is halfway there.  He who blames no one has arrived.” – Old Chinese proverb.

The buck stops with you!

It is important to see yourself as self-employed and accept 100% responsibility for everything you are now and you will ever be. We have to take full responsibility for our actions in life, and in trading. If we make a trade and it loses, then we don’t blame the markets, the computer, our spouses or our mentors (and especially don’t blame ME).

Only when we take responsibility can we actually act and do something about it. If it is always someone else’s fault, how can we improve? Traders simply have to be honest with themselves as to what happened in a trade if  they are going to learn anything at all by their losses.

The whole point of learning to trade is to understand what works, what doesn’t  and be able to adjust to changing conditions in order to come out ahead. It’s impossible to do any of these things if you’re not honest with yourself, and honest about what actually happened during a trade. The main point is this; you shouldn’t fall into the “blame anyone besides me” trap.

You must learn to take complete responsibility for your trading without any excuses. Successful traders will examine reasons for not following the rules, but by not taking responsibility you end up blaming others for your misfortune. You blame the person who gave you that hot tip or the guru who made a recommendation and of course everyone’s favorite place to lay blame, the market.

“It was the markets fault for not co-operating. It was Bernanke’s fault for speaking…”

Accepting 100% responsibility goes a long way to preventing those negative emotions of greed, fear, hope and many others from gaining control. Learning to master your emotions is over half the battle. If you can control yourself and follow the rules it will go a long way to making your trading profitable.

I want to say something now that’s a bit hard hitting and some people won’t like. If you don’t like what I’m about to say then don’t trade. It is simply this… Refuse to make excuses and stop complaining about the things in your life you’re not happy with. You’re responsible for your life and what you do with it. If there’s something about your life that you don’t like, it’s up to you to change it. You’re in charge. Instead of waiting for things to happen, make things happen!

Brian Tracy once said this is the mindset of the truly excellent person. I say it’s also the mindset of the truly excellent trader.

Is Forex Trading Really a Zero Sum Game?

Many people say that trading is a zero sum game, meaning that if you lose $10 someone else gains $10.  This is not actually the case because of the cost of trading, which is your broker’s spread.

Because of the spread Forex trading is a negative sum game.  There are three participants:  the buyer, the seller and the broker.

This means you have to be above average to beat the Forex market.

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