Why I Lost Money In The Market Part 2!

In this article I am going to talk about lot sizing and proper money management, which in my opinion is the holy grail of trading and you will see why.

Lot Sizing

Lot sizing is sometimes referred to as volume. It simply means the specific amount or quantity in units of the base currency in a currency pair. For example, if you want to trade EUR/USD then your base currency is the EURO. In every pair that you see remember that the base currency is always the first quoted currency in that pair and that does not change.

Lot sizes can be harmful if you do not know what you are doing. If you have been trading before you would have realized that small lot sizes make small profits and big lot sizes make big profits and losses in that same order. When I started trading I used to deposit small monies like $30, $40 etc. However, I had no money management plan and I traded big lot sizes which led me to blow countless accounts.

Greed was another problem that made me use big lot sizes even when I was not supposed to. When you are a beginner in forex, I urge you not to believe that you can make big money from the go. It is important that you learn how to trade properly and professionally so, before you can think of making a cent from the market.

As a trader how do you decide what lot size to use you may ask? Well, that depends on your money management plan and how much capital you have available to trade.

Money Management

It is simply how you make money as a trader despite the losses you may have. You may be good a trader but if you do not have solid money management plan in place I doubt you will make money in the markets.

Let’s assume I have $10 000 account and I decide to trade it on a 2% risk which is $200 per trade.

This respectfully means every trade I place I stand to lose $200 should the market move in the opposite direction of my trade. Taking profits will depend on you as a trader but for me I will take my profit at $200. That would be a 1:1 risk to reward ratio. However, there is an approach which is highly profitable that I exploit. I place two separate trades each with a 1% risk. After the first trade takes profit at a 1:1, I leave the other trade to run for more profits and a higher risk to reward ratio.

Now this is where the holy grail is – a high risk to reward ratio in every trade. This will help you stay profitable even though you have losses. This approach has helped me become a consistently profitable trader till date.

However, this is not the only way to manage money, as there are a thousand ways to skin a cat and chances are, you have a different approach.

Unfortunately, when I started trading I did not understand the danger of high lot sizing and proper risk/money management which led me to lose a lot of money.

With that said, I hope you have enjoyed this blog and learned a bit about money management. In the meanwhile, feel free to share your comments below!!!