Money Management in Forex: The Real Deal in Trading
In comparison to the amount of time, money and energy spent by some traders on Forex robots, error-proof technical strategies, and quasi-magical foreign exchange trading courses where we are promised to be made super-traders, it is a pity that money management receives insufficient attention. Although almost every trader worthy of the title is aware that success in Forex is largely dependent on careful management of losses, as well as profits, this aspect of trading is somewhat neglected in preference to indicators, statistics, analysis and strategy. Yet the first issue faced by a beginning trader is losing money while trading, and strategy or analysis doesn't say much about how to cope with it. As such, careful study and practice of money management methods must be paramount in the mind of the trader who is committed to achieving success in trading Forex.
What is analysis? It is the identification of high probability scenarios for profits. Probability does not involve any certainty, and by definition, any analytical scenario, however solid it may be, will lead to losses sooner or later. In the case of the beginner, whose skills are underdeveloped in best cases, and undeveloped in the worst, losses will come a lot sooner than profits. It is clear, then, that any trader's education must begin with a good understanding of the importance and necessity of money management skills.
Money management teaches us how to manage losses, and how to maximize profits. It all commands us to cultivate a responsible and disciplined attitude to trading by acquiring consistency in our habits. We are taught not to be erratic in trade sizes, to be consistent about the entry of stop loss or take profit orders, and above all, to regard loss as a natural, and indeed, inseparable part of a trading career. There are many ways of managing loss, but there is no way of avoiding it altogether in a trading career. Even George Soros has had a number of serious, sometimes massive blunders in his long career, but he is still regarded as a master trader by many. Warren Buffet bought the shares of an oil company at the peak of the oil bubble in 2008, and he made wrong choices with Salomon Brothers in the 90's as well. But all these traders were quick to recognize errors, and mange losses instead of denying them and letting them fester and achieve huge proportions. What happens to those who refuse to accept losses, and choose to add to them with the hope of eventual gains is obvious in the case of Nick Leeson and Jerome Kerviel, one of who bankrupted a UK bank, and the other lost $7 billion. Both went to jail eventually.
So money management is the heart and soul of trading, the safety valve against errors, and the shield against fear and irrationality. Forex trading brokers may give you the tools of technical analysis and tens of indicators, but money management skills can only be acquired by diligent and patient practice, and a total commitment to success in trading. On the other hand, a master of money management is a master trader, and it is but a matter of time before he perfects his skills in analysis and strategy and acquires the great riches which he deserves.
By Carl Hayes
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