In the third article about making forex more mainstream, we’ll examine the role of money management – a buzzword often heard but rarely practiced.
Previous article: Forex Education – The First Step to Make Forex More Mainstream.
Previous article 2: Forex in Banks – Essential for Bringing Forex to the Masses
With stock portfolios, people are advised to have diversity – putting some money in solid stocks, some in small cap stocks, some in bonds, etc. High risk portfolios usually consists of a larger portion for “up and coming” stocks.
Even with such portfolios, the chance of having one of these stocks erase all their value is quite rare. With no leverage, the chance of erasing all the portfolio is even more rare.
In forex, the story is different. Receiving the infamous margin call is quite common. With most traders losing, they rarely withdraw their funds after a few bad trades. Burning out the account is much more common.
This huge gap between stocks and forex trading is due to bad money management, which is usually the result of high inconceivable leverage. Let me make it clear – I support the brokers’ right to allow a high leverage. The NFA limits of 100:1 seem right to me, and the proposed leverage limit of 10:1 from the CFTC is draconian in my eyes.
But high leverage doesn’t mean you have to use it. The basic rule of money management is not risking too much of your account in every trade. If you don’t want to deposit a big sum in your forex account, you’ll have to accept trading with smaller sums – lower leverage.
Brokers have a big role in the current state of money management and can make a difference . Those brokers that emphasize the high leverage, aren’t contributing to the maturity of the industry.
Opening a small account and utilizing the high leverage, will lead most traders to a quick burnout. Those traders will recommend others to stay away from the industry. Traders that utilize a small leverage, will make more trades, have room to learn, succeed, and win trades after losing some.
Those traders that trade longer not only have a better chance of eventually withdrawing funds from their broker, but also recommending it to others and indirectly making the industry more mainstream.
As in the post about forex education, website owners like myself have to educate about this subject.
The web is packed with technical analysis. Also articles about trade psychology are important and they can be found easily. Money management is found mostly as a buzzword, but isn’t thoroughly discussed. I will do my best to raise the issue and discuss it more thoroughly and I hope that others will do it.
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