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There is one component of trading that is a necessity if you wish to become a successful trader and that is money management. With proper money management your trading potential is unlimited, without it you will fail. Too many new traders come into this business and focus only on how much money they can make without any attention to what they could lose. These traders may have some success in the beginning, but eventually they will suffer losses that will debilitate their accounts and leave them with nothing. All of their profits will be gone and they will be demoralized. Many of these traders never recover and stop trading for good.

Successful traders on the other hand realize that the true goal of a trader is not to make money but rather it is to preserve their capital. A traders number one priority should be to minimize losses not maximize gains because trying to maximize gains will put a trader in a bad position. They will end up risking more money than is safe for their account size and if that money is lost then they will have to work twice as hard to get it back. You have to trade as if your capital is the most precious thing in the world to you. Never open a trade with the belief that you are going to win no matter what because if there is one thing a seasoned trader knows its that as soon as you start to think you are a trading god the market will be sure to remind you of just how human you really are.

So, before you take a trade don’t ask yourself “how much can I make” instead ask “how much am I willing to lose if this trade goes bad” and always make sure that number is never more than 2-3% of your account.

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