Psychology Of Risk Management
September 19, 2009 by Ahmad Hassam
Filed under Forex Broker
Many new trader think, Why money management has to be so boring and not sexy, when they hear the word money management. They just dont understand the fact that risk analysis and money management is important in currency trading. Its just this kind of behavior that gets average novice trader into trouble. Why money management is so boring?
Everyone wants to make money and a lot of money. At first glance, getting into a trade is thrill enough in itself. You seduce yourself into thinking that once you enter the trade, the currency market will do exactly what you want it to do and you will end up with a trade that can make you a lot of money. This is what most of the novice traders do in fact think.
You find out to your surprise for some reason or another market is not complying with the plan of making a lot of quick cash and is not going in the desired direction. Then all of a sudden it seems that the market is not at all cooperating. Instead, it is going in the wrong direction.
The trade couldnt go wrong in your opinion. It was a sure thing at that time. Now it has gone so far in the wrong direction that you may have difficulty in getting out. The gut feeling was so clear and compelling when you had entered the trade.
What to do now? Most of this evolution of a position gone bad has to do with you entering the market and risking real cash without having a plan, a stop and a tested money management system before entry.
Most of us do not think it painful enough to change our thinking and take sound money management seriously until we suffer a few losing trades to bring the concept home. Now many of us have faced this type of a situation.
The psychology of risk control sooner or later begins with genuinely believing that you will benefit from a risk control plan. When you have mastered your psychology, you will experience less anxiety in your trading and will be able to implement your trading plan more consistently.
You will reduce your level of stress and anxiety during trading by limiting your loss potential on each and every trade. Never ever risk more than 2% of your equity on a single trade. So the most you will lose on a single trade will be $200 if you have a $10,000 trading account. Think of it as getting a step closer to the winning trade instead of fearing a stop out when your trading system tells you that the trade has gone bad.
As you gain confidence in your money management plan, you will begin to see the profits increase. Your pride will increase from generating greater profits from each trade. That increased pride will make you more confident in your abilities to become a successful trader.
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and currencies. Develop your own Forex Trading System. Get Netpicks Forex Signals Free!
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