The first rule in making money is not to lose it.– Steven J. Lee
When it comes to making money, playing it safe, keeping it close to your heart, and simplifying the process will go along way. And the first rule? Don’t lose it. There’s plenty of advice out there, and Steven J. Lee, a major investor in tech and biotech industries and self-made millionaire, has certainly shared his best bon mots in his book, The Money Plan, but at the heart of it stands one crucial nugget of truth. The first rule in making money, he says, is not to lose it.
If you play with fire, you’re going to get burned. Of course, we never think it will happen to us. It happens to “others” whom are not as skillful or careful as we are. The same sort of thinking also applies to forex trading. Statistics however, dispel this view. More traders blow out their accounts than is acknowledged by traders, as well as brokers whom tend not to publicize this for fear of chasing away business. Indeed the inherent risk involved with trading, even with proper money management, can mean trading accounts can and will become endangered from time to time.
Even traders whom are disciplined, meticulous and cautious most of the time, can succumb to an occasional risky trade (s) which can fatally damage their account balances. Naturally, prudent traders seek to minimize the odds of a blowout, but it can and does happen and traders need to learn not only how to prevent it, but also how to deal with it when it does occur.
This is the golden rule that Warren Buffet lives by, as well as some of the best and brightest investors and traders on the planet. I suppose it is good enough for the rest of us, but then again, how does one interpret? All traders will lose money at some point. How does one deal with it? Indeed, the daily ups and downs of the market ensure that traders will have losing trades just as surely as Warren Buffet has stocks that turn out to be losers. The trick-if one can call it that-is that Buffet does not have too many of those losers in his portfolio, and certainly none that would jeopardize the overall profitability of the portfolio in the long term. Traders should emulate investors and think over longer time periods where losses are absorbed, and the ups, and especially the downs, are smoothed out. This is key. One bad apple in forex-if it is big enough-can spoil the whole bunch. Even traders with a high percentage of winning trades, can see their accounts vanish with one or two large losers. That’s why the focus of trading should be on playing offense, with an offense that includes a solid defense.
Risk, risk, risk management
The law of averages catches up to all of us at some point in our lives. Even more so when the risk profile is larger than norm. The motorcycle rider whom doesn’t wear a helmet, or the sexual adventurer whom doesn’t wear a condom can not remain lucky if they do what they do long enough. It’s the same for traders, whom if truth be told, have some of the same risk taking characteristics as part of their psychological makeup. The reality is that risk can never be fully eliminated, only reduced to a level that may be manageable. Money management is just that. It’s taking a trade or series of trades, and ensuring that they will not do fatal damage to the overall account. This could mean reducing the number of trades made, or the lot size, or reducing the overall exposure in the marketplace by focusing on fewer currency pairs. It is a delicate balance and that is why it is so hard to achieve. The fact is, most forex traders are overzealous when they should be cautious, and cautious when they should take additional risk.
Keep the ego in check, and the greed will follow
Some say that women make better investors and traders because they take less risk than men. Others theorize that they can make better traders because they are less prone to the churning of their egos. Whatever the attribute, a trader needs to keep his or her ego on a leash as it can lead to the type of emotional trading that negatively affects trading. While greed may be a primary motivation, and ambition the fire that keeps the desire to move forward, it can also be detrimental to traders when it is allowed to over rule reason. When traders learn to control their ego-as well as the emotions that ensue from an ego out of balance- the siren song of greed tends to wither away as well.
Always look for ways to reduce risk
Most of the time, traders concentrate on the timing of trade entries and maximizing profit. It can seem counter intuitive but reducing trade size and doing few trades will have a positive influence on the end result. Traders whom layer their trades-going in and out with smaller increments-tend to do better than those that plow in with all their chips. Moreover, the best traders-and most learn this after years of trading-will only trade the higher risk reward ratios and skip those trades which might be winners, but don’t have the best odds, or the best rewards. Often, they will pass on the trades that others will jump into, where the potential reward is only 2 times the potential risk. Instead, they focus only on those setups with a 3, 4 or higher reward factor multiplier.
Go slower, go farther
The irony or trading is that most account blowouts occur when traders are thinking short term profits. Blowouts happen far more often to inexperienced traders, scalpers and day traders. Those with longer perspectives and strategies tend to keep their accounts intact longer. Something to consider when devising a trading plan. You got to be in it to win it, but you don’t need to be in every trade.
Don’t make the same mistakes twice, make new ones
To paraphrase Albert Einstein, to keep doing the same thing over and over and expect different results, is the definition of insanity. Try something new…always. Try a new set of technical indicators. Try trading at different times or with different currency pairs. Try a new set of objectives and goals. Try changing your psychological and emotional perspectives too.
Fall off the horse, get back on the horse
Almost every trader fails at some point. This is normal. Failing is part of the game and often the best learning experience. Indeed, many traders are thankful for past failures and account blowouts as it caused them to become more businesslike in their attitude towards forex trading, as well as more serious about making money on a consistent basis. The sad thing, is that some traders will become so discouraged from losses, that they give up just when they are nearing the ability to use their skills properly. Money-even large sums of money-can be recouped. The challenge, is the will to carry on and succeed.
We are always the grasshopper, never the master
If you are an experienced trader with years or decades of experience, you might still have had occasion to see your account balance below what would normally considered safe. You probably know traders whom regularly trade their accounts to very high multiples each month-exceeding 100% plus -only to lose it all in a series of bad trades. The point is that none of us is ever going to reach the level where we can rest on our laurels because we have mastered the markets. Indeed, those whom reach this point are usually set for a big fall or humbling. Hedge fund manager John Paulson certainly knows this feeling. The key for all traders is to stay in the game as long as possible, and to consistently make money, even if the percentages are below what we fantasize about and occasionally realize.