27 Risk Management

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What is Risk Management? This section is one of the most important sections you will ever read about trading. Why is it important? Well, we are in the business of making money, and in order to make money we have to learn how to manage risk (potential losses). Ironically, this is one of the most overlooked areas in trading. Many traders are just anxious to get right into trading with no regard for their total account size. They simply determine how much they can stomach to lose in a single trade
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  What is Risk Management? This section is one of the most important sections you will ever read about trading.Why is it important? Well, we are in the business of making money, and in order to makemoney we have to learn how to manage risk (potential losses).Ironically, this is one of the most overlooked areas in trading. Many traders are just anxiousto get right into trading with no regard for their total account size.They simply determine how much they can stomach to lose in a single trade and hit the trade button. There's a term for this type of investing....it's called... GAMBLING!     When you trade without money management rules, you are in fact gambling.You are not looking at the long term return on your investment. Instead you are only lookingfor that jackpot .Money management rules will not only protect you but they can make you very profitable inthe long run. If you don't believe us, and you think that gambling is the way to get rich,then consider this example:People go to Las Vegas all the time to gamble their money in hopes of winning a big jackpot,and in fact, many people do win.So how in the world are casinos still making money if many individuals are winning jackpots?The answer is that while even though people win jackpots, in the long run, casinos are stillprofitable because they rake in more money from the people that don't win. That is where theterm the house always wins comes from.The truth is that casinos are just very rich statisticians. They know that in the long run, theywill be the ones making the money--not the gamblers.Even if Joe Schmoe wins $100,000 jackpot in a slot machine, the casinos know that there willbe hundreds of other gamblers who WON'T win that jackpot and the money will go rightback in their pockets.This is a classic example of how statisticians make money over gamblers. Even though bothlose money, the statistician, or casino in this case, knows how to control its losses.Essentially, this is how money management works. If you learn how to control your losses,you will have a chance at being profitable.  In the end, Forex trading is a numbers game, meaning you have to tilt every little factor inyour favor as much as you can. In casinos, the house edge is sometimes only 5% above thatof the player. But that 5% is the difference between being a winner and being a loser.You want to be the rich statistician and NOT the gambler because, in the long run, you wantto always be the winner. So how do you become this rich statistician instead of a loser? Capitalization It takes money to make money. Everyone knows that, but how much does one need to getstarted in trading? The answer largely depends on how you are going to approach your newstart-up business.First, consider how you are going to be educated. There are many different approaches inlearning how to trade: classes, mentors, on your own, or any combination of the three.While there are many classes and mentors out there willing to teach forex trading, most willcharge a fee. The benefit of this route is that a well-taught class or great mentor cansignificantly shorten your learning curve and get you on your way to profitability in a muchshorter amount of time compared to doing everything yourself.The downside is the upfront cost for these programs, which can range from a few hundred toa few thousand dollars, depending on which program you go with. For many of those new totrading, the resources (cash money) required to purchase these programs are not available.For those of you unable or unwilling to pony up the cash for education, the good news is thatmost of the information you need to get started can be found for FREE on the internet  through forums, brokers, articles and websites like BabyPips.com.We should all thank Al Gore for inventing the Internet. Without him, there would be no BabyPips.com.As long as you are disciplined and laser-focused on learning the markets, your chances of success increase exponentially. You have to be a gung ho student. If not, you'll end up in thepoor house.Second, is your approach to the markets going to require special tools such as news feeds orcharting software? As a technical trader, most of the charting packages that come with yourbroker's trading platform are sufficient (and some are actually quite good).For those who need special indicators or better functionality, higher-end charting softwarecan start at around $100 per month.Maybe you're a fundamental trader and you need the news the millisecond it is released, oreven before it happens (wouldn't that be nice!).Well, instantaneous and accurate news feeds run from a few hundred to a few thousanddollars per month. Again, you can get a complimentary news feed from your broker, but forsome, that extra second or two can be the difference between a profitable or unprofitabletrade.Finally, you need money/capital/funds to trade. Retail brokers offer minimum accountdeposits as low as $25, but that doesn't mean you should enter immediately! This is acapitalization mistake, which often leads to failure. Losses are part of the game, and you needto have enough capital to weather these losses.So how much capital do you need? Let's be honest here, if you're consistent and you practiceproper money management techniques, then you can probably start off with $50k to $100k intrading capital.It's common knowledge that most businesses fail due to undercapitalization, which isespecially true in the forex trading business.So if you are unable to start with a large amount that you can afford to lose, be patient, saveup and learn to trade the right way until you are financially ready. Don't Lose Your Shirt
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