In order to reach a level where you can make a living from your currency trading, ensuring your survival and longevity in even the most unpredictable and irrational of market conditions is key. To do this it is important to never risk too much of your account balance on a single trade, no matter how confident you are that the market will move in your favor.
Many traders have heard the oft-quoted statistic that "Over 95% of beginning forex traders will lose, and only 5% will win." Well even if you had a very intelligent and honest forex mentor, what he might not have mentioned is that this applies not just to forex trading but to all financial markets. And it is the same thing that causes that 95% of traders to lose every time: Lack of a proper risk management strategy.
Managing risk in a controlled manner, or rather taking calculated risks, is the best way to ensure your survival in a live competitive currency trading environment. When you open a mini-forex account with $500 and then trade two mini-lots where you are risking nearly a quarter of your account balance on a single trade, this is not real trading. This is gambling, and it's no wonder so many traders lose their shirts doing this.
In order to reach a level where you can make a living from your currency trading, ensuring your survival and longevity in even the most unpredictable and irrational of market conditions is key. To do this it is important to never risk too much of your account balance on a single trade, no matter how confident you are that the market will move in your favor.
I have seen far too many novice traders enter into the market without an exit strategy because they are so sure that the market will move in their favor, and then when their position moves against them they are afraid to cut their losses because they fear the sting of making the P/L loss an actual loss. This can result in frustration, a quickly depleted account balance, and premature baldness. If you value your money and your full head of hair then you should consider integrating the Two-Percent Rule into your trading.
The two-percent rule is very simple to understand: No more than two percent of your account balance should ever be risked on a single trade. Note that this is not the same as allocating two percent of your trading equity to a single trade, which could result in a loss much greater than two percent of your account balance. Ideally, you would want to have this two percent also account for any spreads, commissions, or possible price slippage.
Confidence is the key to successful forex trading, and when you know exactly how much you can afford to lose on a single trade before you enter the market then this can allow you a sense of emotional detachment from any negative market movements. Paradoxically it is the traders who care the least about whether they win or lose that most often stand to gain the most and place the most winning trades.
If you are serious about turning your forex trading from a hobby into a profession, the two-percent rule can be an excellent augmentation to your existing forex strategy. Experience often comes from painful lessons of loss, but with this type of proper risk management principle a trader can prolong their lifespan even with a string of losing trades, allowing them the personal experience of seeing what it takes to succeed in a real life competitive trading environment.
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