We know that money management will give us long-term gains in the Forex market, but now we want to show you the other side of things: What happens if you don’t use money management rules?
Pay attention to this example:
Suppose you have $100,000 in your account and you lose $50,000. You lost 50% of your account.
What percentage of that $50,000 do you have to earn to get $100,000 back?
It’s not 50%… you have to make 100% of your $50,000 to go back to the original $100,000.
This is called a reduction. In this case we have a 50% reduction.
The objective of this simple example is that it is very easy to lose money but very difficult to recover it.
We know that you think it is impossible to lose 50% of the total account in a single operation. But what would happen if you lose money in 3, 4 or 10 transactions in a row?
Assuming you have a good trading system, let’s pay attention to this example:
In Forex trading we are always looking for some advantage. That’s why traders develop systems. A system with 70% profit sounds like an excellent system.
If your system gives you profits 70% of the time, it means that for every 100 trades you open, you are going to win at 70, or 7 out of 10.
But how do you know when those winning and losing operations are going to happen?
You don’t know. You can lose the first 30 trades and win the remaining 70. That gives you 70% profitability. But, you should ask yourself, could you stand 30 loser trades in a row and keep trading?
This is why Forex money management is so important. No matter what system you use, you may eventually have a bad streak. Even the professional poker players, who live off the game, go through horrible losing spells, and still end up with profits.
The reason is that good poker players have money management rules because they know they won’t win every tournament they play. They only risk a small percentage of their accounts in order to survive the bad spells.
This is what you should also do as a Forex currency trader. Risking only a small percentage of your account on each trade in order to survive the bad spells. Remember that if you have a good trading system and practice strict rules for long-term money management… you will always win!
Let us illustrate in the following article of our Forex course what happens when you use the right rules to manage money and when you don’t…