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Forex Gambling Mentality Kills Profits

Every forex trader understands that we need to use basic forex money management to be successful at forex trading online.

This mentality caused a winning series of trades (60% success) to lose 700% of a forex trading account that should have gained 520%. Read this post to see how a profitable forex trader can still lose so much money, and how you can prevent this from happening to you.

Confession: This trader was me a few years ago when I got started trading forex online. I’d be willing to bet something like this has happened to you…

Why is Money Management important?

It prevents what I call the “Forex Gambling Mentality,” when you see how this can turn online forex trading PROFITS into LOSSES, hopefully you’ll beat this dangerous way of thinking forever.

What is the Forex Gambling Mentality?

When you follow impulsive decisions to determine the amount of risk you take on a forex trade, you are falling into the Forex Gambling Mentality. Anything outside of a predetermined money management strategy is considered a forex gambling mentality.

Let’s look at an example:

• You enter trade #1 and risk 10 pips to make 10 pips. The trade succeeds and you make 10 pips!
• You enter trade #2 and risk 10 pips to make 10 pips. The trade succeeds and you’re now up 20 pips!
• You are felling good, so on trade #3 you risk 20 pips to make 20 pips.  The trade succeeds and you’re now up 40 pips!

At this point you’re feeling like you’ve mastered forex trading. You get out your calculator and start figuring out that at this rate of compounding your forex trading profits you’ll have $2.5 million in your online forex trading account in about 9 weeks (TRUST ME – I’ve actually thought this way, and you probably have to).

You are now cocky and you start trading again, since you’re on a roll you decide to trade more lots to make more money faster.

• You enter trade #4 and risk 40 pips to make 40 pips. The trade fails and now you are at breakeven!

You’ve still been successful 3 out of your last 4 trades, so you do another trade:

• You enter trade #5 and risk 40 pips to make 40 pips. The trade fails and now you are down 40 pips!

Now you get nervous and decide to be more conservative, so you go back to what was successful for you in the past:

• You enter trade #6 and risk 10 pips to make 10 pips. The trade succeeds and you’re only down 30 pips!
• You enter trade #7 and risk 10 pips to make 10 pips. The trade fails and you’re down 40 pips!
• You enter trade #8 and risk 10 pips to make 10 pips. The trade succeeds and you’re only down 30 pips!

You now look at your past 8 trades. You think to yourself  “I’ve been right 5 out of 8 times, or 62.5% of the time.  I’ve been allowing my emotions to control me. I need to stick to my plan. If I just risk 20 pips to make 20 pips, I’ll be successful.”

So you do the following:

• You enter trade #9 and risk 20 pips to make 20 pips. The trade succeeds and you’re only down 10 pips!
• You enter trade #10 and risk 20 pips to make 20 pips. The trade fails and you’re down 30 pips!
• You enter trade #11 and risk 20 pips to make 20 pips. The trade fails and you’re now down 50 pips!

You’re down 50 pips, so you look at what you’ve been doing to try to analyze patterns and stop making the same mistakes. You’re not too worried yet, so you notice the following. You’ve still been right 6/11 times. You also notice that you’ve never had three failing trades in a row. Since you just had two failed trades, now’s your turn to put the odds in your favor. So you decide to go for breakeven and risk 50 pips to make your money back:

• You enter trade #12 and risk 50 pips to make 50 pips. The trade fails and you’re now down 100 pips!

Now you feel like you’re having bad luck and aren’t going to risk any more money wildly. You’re still in the game and you know you can still make money with trading forex online, so you go back to risking 10 pips and the following happens:

• You enter trade #13 and risk 10 pips to make 10 pips. The trade succeeds and you’re only down 90 pips!
• You enter trade #14 and risk 10 pips to make 10 pips . The trade succeeds and you’re only down 80 pips!
• You enter trade #15 and risk 10 pips to make 10 pips . The trade succeeds and you’re only down 70 pips!

STOP! END OF EXAMPLE

It doesn’t seem right that a forex trader who is profitable 9 out of 15 times (60% of the time) could lose so much money trading forex online. This is the same reason that compulsive gamblers lose money, they don’t follow basic forex money management of trading only 2% of their account per trade. By doing this the forex trader gets to be more profitable. This is what forex losers do.

A forex winner who is free of the forex gambling mentality would have had the following experience (with the same trades):

• You enter trade #1 and risk 10 pips to make 10 pips. The trade succeeds and you make 10 pips!
• You enter trade #2 and risk 10 pips to make 10 pips. The trade succeeds and you’re now up 20 pips!

You notice that your account size has grown & you can now safely risk 12 pips to make 12 pips.

• You enter trade #3 you risk 12 pips to make 12 pips.  The trade succeeds and you’re now up 32 pips!
• You enter trade #4 you risk 12 pips to make 12 pips.  The trade fails and you’re still up 20 pips!
• You enter trade #5 you risk 12 pips to make 12 pips.  The trade fails and you’re still up 8 pips!

You notice that your account size has shrunk & you can now only safely risk 10 pips to make 10 pips.

• You enter trade #6 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 18 pips!
• You enter trade #7 and risk 10 pips to make 10 pips. The trade fails and you’re still up 8 pips!
• You enter trade #8 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 28 pips!

You notice that your account size has grown & you can now safely risk 12 pips to make 12 pips.

• You enter trade #9 and risk 12 pips to make 12 pips. The trade succeeds and you’re up 40 pips!
• You enter trade #10 and risk 12 pips to make 12 pips. The trade fails and you’re still up 28 pips!
• You enter trade #11 and risk 12 pips to make 12 pips. The trade fails and you’re still up 16 pips!

You notice that your account size has shrunk & you can now only safely risk 10 pips to make 10 pips.

• You enter trade #12 and risk 10 pips to make 10 pips. The trade fails and you’re still up 6 pips!
• You enter trade #13 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 18 pips!
• You enter trade #13 and risk 10 pips to make 10 pips. The trade succeeds and you’re up 28 pips!

You notice that your account size has grown & you can now safely risk 12 pips to make 12 pips.

• You enter trade #14 and risk 12 pips to make 12 pips. The trade succeeds and you’re up 40 pips!
• You enter trade #15 and risk 12 pips to make 12 pips. The trade succeeds and you’re up 52 pips!

You notice that your account size has grown & you can now safely risk 14 pips to make 14 pips.

Would you rather be up 52 pips, or down 70 pips?

This is the difference between the Forex Gambling Mentality and Basic Forex Money Management.

Posted in Money Management

Total Basics of Forex Trading

When I started this blog, I skipped some of the ultra basics of forex trading. But since there are many beginners now visiting the rapid forex blog, I wanted to explain some of the most basic concepts.

If you’re just discovering the wonderful world of forex trading online, then this is a post that you’ll want to take the time to read this.

The Total Beginner Basics of Forex Trading

The Foreign Exchange (Forex) market is where banks, investors and speculators exchange one nation’s currency for another.  The Forex has been around since the early 20th century, but it was not until well after the beginning of the computer revolution of the 1990’s where independent investors (like you and I) had access to invest small amounts of money in the Forex.

The Forex is like the stock market in one critical way (among others); to make money in forex trading you must buy low and sell high.

You may do this in two ways.

1. In the stock market, the traditional way is to buy a position and sell it after it goes up in value.  You can also do this with forex trading online.
2. The second way to make money with forex trading is to sell-short a stock and then later try to buy it back at a lower price.  In stock market investing there are severe restrictions and dangers to selling short.  The beauty of the Forex market is that there is no distinction between buying and selling short. This is because all transactions are dual-faceted.

Currencies are always traded in pairs. A typical pair is EUR/USD (Euro over US dollar).

The first currency is the base currency.  The second currency is the counter currency or quote currency.

The first currency is the base.  So you must view it as the amount of the second currency needed to buy one unit of the first currency. If you want to buy the currency pair you are actually buying the EURO and simultaneously selling the USD.

If you were going to sell the pair you would simply be selling the base currency (EURO) and buying the USD.  Whether you are buying or selling the pair is just a matter of which one you are buying or selling.

The good news is that you don’t have to remember which one to buy or sell, simply think of the whole pair as one item and you are buying or selling the whole pair.

An open trade or position is one in which a trader has either bought/sold one currency pair and has not sold/bought-back the equivalent amount to effectively close the position.

Pips in Forex Trading

Currency pairs are carried out to 4 significant digits.  The change of the currency pair by one one-hundredth of a percent is called a pip.  So if the currency was trading at 141.53 – a one-pip increase would be 141.54.

Similarly, an increase of one pip could also be 1.6138 to 1.6139.  A fall of one pip would be a move from 1.2345 to 1.2344.  This is just lingo, in the stock market a point is when the stock increases or decreases by $1.

Posted in Forex Basics