Being Right and Making Money are not Alike
28 January, AtoZForex — Let us assume that someone can guarantee that you will make Lots of money by the end of the year. Enough money so that you can finally afford that yellow Lamborghini or that brand new flat with the sea view. That someone could guarantee you that you would make this money, however you would probably lose 70% of your trades. Would you be ok with that? I guess you would, why should you actually care? It’s the end result that matters; in the end.
Some of you might be wondering how is it possible to lose 70% of your trades but still be profitable. Well, it’s the same as being right 70% of the time, but still losing overall. Being right and Making Money are not alike, and you can blame human psychology for that. You see, the prevailing emotion when the majority of beginner traders have a winning position is FEAR. They are afraid that the Profits they have made are going to disappear if they don’t close the deal fast enough.
On the contrary, when beginner traders carry a losing position, the prevailing feeling is HOPE. They hope that somehow magically the market will reverse and the loss will become smaller, or that the trade will even turn profitable. “If only I can wait 5 more minutes”, “if the price only jumps to where it was a while ago – I promise I will exit this trade”. These are all examples of the inner voice of the trader that starts dominating when the positions don’t go as planned. Numerous times have I seen traders, add more and more margin to their position, hoping that if they hold on to it just a little longer, things will return to normality, hoping that the position will not make them suffer a loss. They hope that they will prove to be right in the end.
The reality on how to trade successfully is different though.
Forex trading is like Boxing
Everyone knows Mike Tyson. World champion at the age of 18, he is the equivalent of George Soros for trading (a bit scarier though). No matter how Good Tyson was at his prime, I doubt that he ever went through a fight, without getting at least punched a few times by his opponent. And it was ok. What mattered was that at the end of the fight, it was him being cheered by the crowd.
In similar matter, George Soros has lost some trades too. And I’m sure it was ok for him also.
Forex trading is like boxing in the sense that it is impossible to fight (trade) without getting punched (losing some trades). What matters is not to get knocked out, not to experience that big loss that will put your investment at risk.
That is why we must control risk and apply some general money-management guidelines.
1. It might not be a good idea to commit more than 3-5% of your capital to any trade.
2. Use protective stops in all your trades. Cut your losses short and let your winners ride the trend.
3. Avoid adding to a losing position. You might have gotten lucky last time, but with the same strategy it is a matter of time until you are not.
4. Apply a risk reward of 2-1 or even 3-1 for every trade. In other words, if you risk $1000 then you should aim for a minimum of $2000 profit.
I cannot stress enough the importance of surviving in the FX arena and applying correct risk management. As my mentor always said: “take care of the risk and the profits will come by themselves”.
On a different note, based on the turmoil that the SNB decision caused, Easy-Forex has committed to cover any negative balances that occur from gaps, while Stop loss orders are executed with no slippage. “What you set is what you get.”
About the Expert: Nicolas Shamtanis is a highly experienced professional within the Forex market, since it is his 8th consecutive year in this unprecedented and volatile market. Forthwith, he is the Chief Client Relationships Officer at Easy-Forex and is duly responsible for maintaining the high quality standard of services provided to VIP clients.
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