One of the important rules of Forex trading is to keep your losses as small as possible. With small Forex trading losses you can survice the times when the market moves against you and you will be well positioned for when the trend turns around. The proved method to keep your losses small is to set your maximum loss before you even open a Forex trade. The maximum loss is the greatest amount of money which you are comfortable to lose on every trade. Unlike the 95% of Forex traders who lose money because they have not used reasonable money management rules to their trading you will have success by having this money management rule in your mind.
What will if you do not set a maximum loss? Let us have a look at an example. If you have a Forex trading float of $1000 and you began trading with $100 per every trade it would be reasonable to experience a maximum of three losses in a row. This would reduce your Forex trading capital to $700. What do you think those 95% of traders say after this experience? They would conclude: "Well, I have already had three losses in a row. So I am really due for a win now."
So they would decide that they are going to bet $300 on the next trade because they think they have a higher chance of winning.
If that trader bet $300 on the next trade because he thought he was going to win his capital it could be reduced to $400. His chance of making money now are very slight. He would need to make 150% on his next trade just to break even. If he had set his maximum loss and stuck to that decision he would not be in this position.
Here is a perfect example why the most people lose money in Forex trading. Let us start with another $1,000 float in mind and start our Forex trading with $250. After only three losses in a row we have lost $750 and our capital has been reduced to $250. So we must make 300% return on the next trade which will allow us to break even.
In both of these cases the reason for failure was the same because the trader risked too much and did not use a reasonable money management. Please have in mind: the aim here is to keep your losses as small as possible while also making sure that you open a large enough position to capitalize on profits. With your money management rules in place and a good Forex trading system you will always be able to do this.