One of the most important rules of Forex trading is to keep your
losses as small as you possibly can. With small Forex trading losses,
you can stick it out longer than those times when the market moves
against you, and be well positioned for when the trend turns around.
The one proven method to keeping your losses small is to set your
maximum loss before you even open a Forex trading position.
The maximum loss is the greatest amount of capital that you
are comfortable losing on any one trade. With your maximum loss set as
a small percentage of your Forex trading effort, a string of losses
won't stop you from trading for any particular amount of time. Unlike
the 95% of Forex traders out there who lose money because they haven't
begun to use wise money management rules to their Forex trading system,
you will be ok with this money management rule.
To use as an example, If I had a Forex trading float of $1000,
and I began trading with $100 a trade, it would be reasonable for me to
experience three losses in a row. This would reduce my Forex trading
capital to $400. It would then be decided that they're going to bet
$200 on the next trade because they think they have a higher chance of
winning after having lost three times already.
If that trader did bet $100 dollars on the next trade because
they thought they were going to win, their capital could be reduced to
$250 dollars. The chances of making money now are practically nil
because I would need to make 150% on the next trade just to break even.
If the maximum loss had been determined, and stuck to, they would not
be in this position.
In this case, the reason for failure was because the trader
risked too much money, and didn't apply good money management to the
play. Remember, the goal here is to keep our losses as small as
possible while also making sure that we open a large enough position to
capitalize on profits and minimize losses. With your money management
rules in place, in your Forex trading system, you will always be able
to do this.
by Don Spanish