About Capital Management:
It does not seem to be truth but sometimes the simplest thing can be (for somebody) the hardest thing to accept and understand. While we keep moving in this exciting trading world we find many people who have no idea of how to manage an account either demo or even worse a real one. This article is for them or might be for you.
Forex trading should be SIMPLE says several scholars. Without a doubt those who make it complicated is because they do not know how to trade or have not learned yet how to do it right.
Many of them in the beginning of their trading learning process, the first thing they do is play with their demo account, doing meaningless trades and even worse, thinking that an account is like going to the casino and betting on betting becomes their flag. They start trading by risking amounts that have nothing to do with a real account and live a constant lie.
Think about it. When many people start trading the first thing they do is open a demo account of $100.000 or $500.000 to “practice”. There is nothing wrong with practising, the wrong thing is to think that by the grace of the Holy Spirit the Novice trader will be doing the right things. Having an initial amount so large the novice trader also creates “big” positions and there is where the great fallacy begins.
Winning or losing that’s secondary, your bad Capital Management or you not Capital management at all will sooner or later destroy you.
Whether abusing the number of lots or trading too many pairs at the same time, this novice trader will end up risking more than the necessary. The grand finale is that in one way or another the trader will end up creating a “habit” out of this, and will repeat the same bad habits when trading with a real account.
It is a fact, many of the great losses for traders of futures, commodities, options, etc. is due in vast part because they repeat bad habits from the time when they traded with demo accounts, (Think for a moment, remember that happened to you when trading for real), the truth is that the trader falls into that vicious loop again.
Do not forget that human beings many times acts by habits, but this in trading is lethal.
In Capital Management, Stephen Covey the Master in administration says, in his book The Seven Habits of Highly effective: “Chains of habit are too light to be felt until they are too heavy to be broken“. This applies to everything my friends, for work, family and even Forex.
An example. Imagine a trader who opens an account of $10.000 and developed the habit of risking 10% of total capital on each position. Suppose (which is actually quite possible) that this inexperienced trader has lost uninterruptedly in his first 10 positions. After the tenth position the account is now less than 35% of the initial capital.
Alexander Elder (Forex’s extraordinary scholar) has a phrase that I think is great: “The first thing a trader must learn is to survive and then to be a constant and consistent winner.” His phrase brings together everything that a good book of Capital Management for trading might contain.
When you start trading Forex the first thing to do is to learn to respect the market and do not allow it to sweep your account, thus you need to learn Capital Management first (for it no to happens as it happens to the vast majority of inexperienced traders).
A trader cannot risk more than 2% of the total amount of his account. Capital Management is a matter of survival.
I talk about any kind of account whether it’s a standard, Mini or a micro account.
Regardless of the amount the maximum capital on risky should not exceed 2%, only so if you can recuperate again in case of a bad time of losing positions. And believe me, a bad time happens even to the best trader in the world, it could happen to me too and it will happen to you (anytime). Losing is part of this business and you have to learn to live with it.
A trader with a Capital Management strategy who risks only 2% of the total capital for each position, could lose uninterruptedly up to 30 times and still keep almost 55% of his money. That is survival and that is call Capital Management with intelligence (despite having lost in a tremendous way).
Now, if someone loses 30 times in a row, then the least thing to do is to check the strategy or go back study from the basis (if not, then explain to me how you can lose so many times?) but hey, that’s another article.
The truth of the matter is that this trader could still be opening positions after fixing his/her mistakes.
That is what Capital Management is all about.
I know that many of you get into this wonderland marvelled at how quickly you can be filled with profitability and how accessible the currency market is, as well as several advantages over other financial markets, but what they are not saying is that the person who is learning how to trade must learn it the right way
Do you think it is easy to lift up an account which remaining is 35% of the initial capital? Forget it, is an almost impossible job.
However, this situation is common among traders who have just started and unfortunately a constant, because of the ignorance and the lack of emotional control, plus a poor or not existing Capital Management. And I’m sure it must have happened to you at some point in your trading and if it still does not happen to you, great! congratulation for reading this article for it to never happen to you.
In my experience as a Forex teacher I came to know traders who made the trading riskier still, and at the end they only managed to destroy their accounts in a flash.
Traders who risked 20% (and sometimes even more) by each position.
Is it your account completely destroyed?
Do not let it fool you, this is our daily bread, especially with people who want to learn trading in a self-taught way and have no even a clue of the Capital Management words.
I can help you develop your strategy and a healthy/safer Capital Management, you can just register on ForexView, then we start the coaching on my side and the profiting on yours. This is not a promise of profit but if you do things right and controlled, more will be the winning than the losing.