HOW TO DESTROY THE BIGGEST PROBLEM FACING MOST TRADERS!!!
Anyone of us beginning the journey of trading the financial markets have a few obstacles to overcome before we have any chance of success.
The first nut to crack (so to speak) is that of a methodology for making trading decisions. These signals could be for “Long” trades, “Short” trades or perhaps just exit trades. Once you have a methodology you then have to face the MOST IMPORTANT PROBLEM that faces most traders. This problem is MONEY and RISK management.
The only way to be successful in trading is by having strict money and risk management strategies in place.
No matter how good your methodology, if you do not have the correct money management and risk strategies in place you are doomed to failure. This is why many traders fail.
In todays market place one of the great advantages to the retail trader is that they do not have to deposit much money with a trading firm or spread betting firm to get started on their financial journey. The margin requirements are small compared to what they were not so many years back.
This is all well and good in one aspect but it is also the reason where most fail.
You might ask WHY?
Let’s say you open a trading account with say £200. You begin trading the GBP/USD forex instrument at £1 per point. Based on your methodology your protective “Stop” is some 50 points/pips from your entry. That means your risk is £50. The first trade goes wrong. Your account is now down to £150. You have just lost 25% of your account value. This scenario means that with only 4 wrong trades you have just blown your account. To have 4 wrong trades in a row might seem unreasonable with a good methodology but it might just be the case that the trading instrument has went into sideways movement and before you know it you are “finito”. Using this trade above as an example the correct spread betting account balance should be at least £2000. This brings down ones risk factor to about 2.5% of their account size. This means that with 4, 5, 6 or 7 losing trades in a row they are far from been in trouble. Not anywhere near “finito”.
The lesson here is only to begin real-time trading when you are able to properly fund an account that is risking no more than 2 or 3 percent of your account. This is much easier said than done as far as the mind of many of us human beings because we feel we cannot make money quick enough. This is not trading as a professional but trading as a GAMBLER! We don’t want to gamble.
A trader should be always trading in a non-emotional basis. If emotion comes into it then the chances of success are much less.
Learning to assess risk is one part of money management but assessing the needed reward of a trade is the part of the other side of the equation.
To grow ones trading account the reward factor needs to be greater than the risk factor.
A known fact from a professional traders perspective is that if they have a trade success rate of 50% it is classed as being excellent.
In order for them to grow their trading funds accounts it is required that their reward ratio is always higher than their risk ratio. A reward ratio of 2:1 is a minimum requirement for trading success with a high trade success rate but with a lower trade success rate then a reward ratio of greater than 2:1 is required.
Determining lot size or the amount of shares to purchase in relation to account size and then determining the risk to reward is the key to being a successful trader and is the difference between a trader who is going to grow his trading account balance and one whom is not.
On our trading workshops we teach a complete money management strategy that we expect all our students to adhere to for their trading success.