Money Management Principles

Trade With Sufficient Captial
One of the worst blunders that forex traders can make is attempting to trade without sufficient capital. The trader with limited capital not only will be a worried trader, always looking to minimize losses beyond the point of realistic trading, but he will also frequently be taken out of the trading game before he can realize any sense of success trading the method(s) or patterns.
Exercise Discipline
Discipline is probably one of the most overused words in forex trading education. However, despite the clich discipline continues to be the most important behaviour one can master to become a profitable trader. Discipline is the ability to plan your work and work your plan. It’s the ability to give your trade the time to develop without hastily taking yourself out of the market simply because you are uncomfortable with risk. Discipline is also the ability to continue to trade the methods and patterns even after you’ve suffered losses. Do your best to cultivate the degree of discipline required to be a world-class trader.
Employ Risk-to-Reward Ratios
The following shows you possible risk-to reward ratios, and the win ratios required to break even in a trading system.
Risk-to-Reward Ratio (in pips) and Win Ratio Required to Break Even(%)
40/20 (2 to 1) = 67%,
40/40 (1 to1) = 50%,
40/60 (1 to 1.5) = 40%,
40/80 (1 to 2) = 33.5%,
60/20 (3 to 1) = 75%,
60/60 (1 to 1) = 50%,
60 /90 (1 to 1.5) = 40%,
60/120 (1 to 2) = 33.5%

Important Note

Never risk more pips on a trade then you plan to make. It doesn’t make sense to risk 100 pips in order to make only 10. Why? See below example.
Profit taking level (pips): 10
Stop used or pips at risk: 100
You win 10 times which makes 100 winning pips. You ONLY lose once and have to give back all profits!!!
This type of trading makes no sense and you will lose on the long term guaranteed!

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10 Bad HabbitS in TRadiNg

The most common bad habbits discussed by traders are greed and fear. In fact, some maintain that the only emotion that they contend with is fear: fear of suffering a loss, and fear of missing out on an opportunity. The actual array of emotions is far more complex than that. How many of the following do you recognize?

Excitement
Early man probably experienced an adrenaline rush while hunting: stalking his prey or a member of an opposing tribe. Nowadays we are more likely to experience excitement when dealt a straight flush in a game of poker; or when our latest trade starts trending upwards on big volume.

Elation
Recognize Tiger Woods' fist pump when he holes a 20 meter putt? Or the roar of the crowd when the home side scores a touchdown? Or when your trade has jumped almost 100 per cent inside 2 weeks.

Fear of Losing Out
The crowd behavior at a closing down sale: "Grab as much as you can". Or buyers when stocks are gapping up in a strong bull market: "I don't care what the price is, just get me in".

Fear of Failure
The trepidation a weekend golfer feels when standing in a deep sand bunker; or the uncertainty and indecision you face when placing a trade after a string of losses.

Fear of Impending Threat
When you see a police car in your rear-view mirror; or when the dentist says: "This isn't going to hurt much." Or when your stock posts three large red candles.

Denial (not a river in Egypt)
When price gaps down through your stop level: "This is not happening to me -- there must be some mistake."Victor Sporandeo describes this well: When we confuse our wishes with reality. Denial is forlorn hope; a refusal to accept the situation:

• "This is just a temporary aberration -- everything else is still going up."
• "I am sure that the stock will bounce at $4.20 -- I'll move my stop down to below there."
• "The fundamentals are still good -- I'll hold for the long run."

Anger
The attack response triggered when someone cuts you off on the highway; or steals your parking space; or when a trade just won't go your way:

• "I've been cheated."
• "Brokers are a bunch of thieves."
• "It's the government's fault - they should protect us."

Frustration
Inward-directed aggression. Irritability. Negative self-talk: "You idiot -- how could you have missed that."

Inertia
An inability to concentrate or make decisions. You review more than twenty different indicators, many of which you have not used in the past two years, in an attempt to arrive at a decision -- while price ticks inexorably downwards.

Panic
What Hamilton referred to as the abandonment of hope: "I don't care what the price is, just get me out."

Despair
Feelings of loss, sadness, worthlessness or helplessness. Loss of confidence.

Acceptance
Resolution of the whole process. Recognition of past mistakes. Acceptance that you have to incur losses if you want to make profits. The inner calm that comes from having "let go". A feeling of having gained from the experience. An expectation that you will do better the next time. Confidence restored.

Conclusion
Each of the above emotional states is triggered by a different chemical cocktail released by your endocrine system. Most severely impact on your ability to make rational decisions while trading. Later pages will discuss strategies for managing your emotions in order to enhance your trading.

Phsycology of Trading

Your biggest enemy, when trading, is yourself. Success will only come when you learn to control your emotions. To become a professional trader, you have to manage yourself, either your mental and your emotion. Here are some advice that you can applies in order to success in forex

1. Caution
   Excitement (and fear of missing an opportunity) often persuade us to enter the market before it is safe to do so. After a down-trend a number of rallies may fail before one eventually carries through. Likewise, the emotional high of a profitable trade may blind us to signs that the trend is reversing.
2. Patience
   Wait for the right market condition before trading. There are times when it is wise to stay out of the market and observe from the sidelines.
3. Conviction
   Have the courage of your convictions: Take steps to protect your profits when you see that a trend is weakening, but sit tight and don't let fear of losing part of your profit cloud your judgment. There is a good chance that the trend will resume its upward climb.
4. Detachment
   Concentrate on the technical aspects rather than on the money. If your trades technically correct, theprofits will follow.
   Stay emotionally detached from the market. Avoid getting caught up in the short-term excitement. Screen-watching is a tell-tale sign: if you continually check prices or stare at charts for hours it is a sign that you are unsure of your strategy and are likely to suffer losses.
5. Focus
   Focus on the longer time frames and do not try to catch every short-term fluctuation. The most profitable trades are in catching the large trends.
6. Expect the unexpected
   Investing involves dealing with probabilities – not certainties. No one can predict the market correctly every time. Avoid gamblers’ logic
7. Average up - not down
   If you increase your position when price goes against you, you are liable to compound your losses. When price starts to move it is likely to continue in that direction. Rather increase your exposure when the market proves you right and moves in your favor.
8. Limit your losses
   Use stop loss orders to protect your funds. When the stop loss is triggered, act immediately - don't hesitate.
   The biggest mistake you can make is to hold on to falling stocks, hoping for a recovery. Falling stocks have a habit of declining way below what you expected them to. Eventually you are forced to sell, decimating your capital.

Human nature being what it is, most traders and investors ignore these rules when they first start out. It can be an expensive lesson.

Control your emotions and avoid being swept along with the crowd. Make consistent decisions based on sound technical analysis.

Source: Edwin Lefevre's Reminiscences of a Stock Operator (1923)