Hi
Great question.
Now lets get into it. Most traders think the main job is to find entries into the market. They spend all of their times watching charts and testing indicators but never make any money.
There is a very good reason for this, As a trader your main job is actually cash management. Protecting your initial investment. Your time should be spend learning how to manage your money.
You see Forex is a numbers game, Did you know you can actually lose more times than you win a trade and with strict money management you can still grow you balance.
Let’s use a basic example of ten trades trading 0.01. Which is 10pence a pip. For simplicity we will risk 100 pips on each trade and hope to make 200 pips on each trade. This would mean you have a 1:2 risk to reward ratio.
Now this is the first crucial point, when you decide weather to take a trade you must always plan to make more than you would lose if the trade went against you.
As I said earlier on each trade we will risk 100 pips so if you lose the trade you would end up losing £10.00. Now here is where it gets interesting.
If you lost six out of ten trades you would lose £60.00 in total. If you won the remaining four trades with a 1:2 risk ratio you would make £20 a trade and the total would be £80.
From this example you can clearly see you have made a profit of £20.00 even though you have lost most of your trades.
Now if you implemented this strict money management plan, all you would then need to do is find a better trading system with a higher win rate and you are in business and well on your way to making a ton of cash.
This is why I say a traders most important job is to manage the money in their account. Trading is secondary.
I can show you many systems that will make money, however you will not make any money with them without applying strict money management.
