Becoming a Forex trader in your free time isn’t as hard as it seems. Read our simple guide to get started.
Only one thing will determine whether you’ll still be trading in five years or not. Strategies can change, experience can be gained and every trader will experience a few bad months. Money management is the only thing that will keep a trader going after a bad week. If you only remember one the from this entire series, remember to manage your account to be able to trade another day. The principle is simple: Avoid leverage that can wipe out your entire account with a single trade. Plan the risk and profit before taking a trade. Never, ever chase after profits or try and make up for losses.
Every trader has his own set of rule for deciding on the size of a position. The method described here will not make you a fortune overnight but it’s professional advice that will keep you in the markets long enough to become an experienced and professional trader.
To determine the size of a position, calculate exactly 1% of the value of your entire trading account – meaning if you have ₤100 in your account, use only ₤1 on a single position. As you gain experience, you’ll learn how to add to positions but first get the basics under control.
With the 1% rule, we’re aiming to lose no more than 1% of our trading account in the event of a loss and taking 100% profit with a winning trade. Setting stoplosses and limit orders at exactly the right levels is the most important aspect of this strategy. For instance, in that ₤1 trade, you would calculate where your stoploss should be to lose no more than ₤1 and your limit order will put ₤2 into your pocket.
Using a money management strategy similar to this will protect your trading account even if you suffer 100 losing trades in a row. Money management is by far more important than the performance of a strategy – a strategy with a 40% success rate can still make a profit but if a trader wiped their account in the first trade, they won’t be able to make the 99 other trades that should bring in the profit.
Never try to make up for losses
As a trader, you’ll set yourself goals for specific time periods, say, for instance, you’ll be working towards making a 15% profit every week. Losing trades happen and, knowing the temperament of the market, she’ll probably run you a losing streak on Thursday if you are working towards a 15% goal by Friday. The greatest risk traders face, is an emotional attachment to money and profit.
As a general word of advice – rather miss your goals and sit out of the markets for a day, than trying to make up for losses. Chasing traders will often see trades where there is none, risk too much of their investment and make unnecessary mistakes that will only cost money. Take the knock with a smile and try again tomorrow, rather than multiplying your losses.
Read also Part 1, Part 2 and Part 4 of the “How to become a part-time Forex Trader” guide.