15 LESSON OF FOREX

LESSON #13:
Equity Management & Margin Control

Because we're readily admitting that YOU will pre-judge this Lesson, based off its title above, as boring and quickly dismiss it as "something I've heard before" (hey, didn't we tell ya we KNOW human nature), we're going to go ahead and make a....

A VERY BLUNT IN-YOUR-FACE KINDA STATEMENT (not to offend you, just to keep you paying attention) and then TELL YOU A GRUESOME STORY. First the straightforward comment:

>>> 95% of the successful (full-time, well-paid) FOREX Traders we know feel that money-management is more important than the trading. And, it's so, so important to us that we believe if you don't grasp, and follow, the basic rules below, YOU WILL FAIL! (Hey, don't take this personally. It is what it is).

Okay, on to the story.

Bloody Tale of Vicious, Senseless Animal Slayings Guides FOREX Traders to True Wisdom.
A donkey, a lion, and a fox decide to go out hunting for rabbits. After a pretty good day of hunting, they had collected a large pile of rabbits. The lion says to Mr. Donkey, "I'd like for you to divide the rabbits fairly among the three of us."

So, the donkey took the rabbits and made them into three equal piles and said, "How's that?" The lion immediately pounced on the donkey and killed him.

Then the lion threw all the rabbits on top of the donkey and made one big pile. The lion turned to Mr. Fox and said, "I'd like for you to divide the rabbits evenly between the two of us." The fox walked over to the pile of rabbits and took one little scrawny rabbit for himself and put it in his pile. He left the rest of the rabbits in the large pile and said, "That pile of rabbits if for you, Mr. Lion."

The lion said, "Mr. Fox, where did you learn to divide so evenly?"

And the fox replied, "The donkey taught me."

===========================

The Moral of the Story ?

Well .... it seems quite clear it is this: if you can learn from your own mistakes, you are smart. However, if you can learn from others mistakes, then you are wise.

Yup, we agree with this. And, by reading the listed rules we have below to share with you, you will accelerate your profit-making potential in your own FOREX trading business.

You're about to read the combined wisdom of various traders who have "been there, done that." Traders who have experienced setbacks, challenges, and turned those temporary failures into successes. We've paraphrased these timeless rules (do's and don'ts) into our own words.

WELCOME ABOARD Rapidforex .... you're about to experience the thrill of hunting rabbits with a FOREX Lion. However, in this case, you won't get killed :-)

======================================

Equity management and properly handling leveraged margin accounts is the most significant part of any trading system. Again, most traders just don't understand how important this aspect of running a FOREX business is. The ones who DO ... know it's the critical point that separates the winners from the losers.

It was proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year. In spite of the 60% winning odds 95% of traders will lose because of their poor management of account equity.

But, the good news is, you don't have to be a mathematician or understand portfolio theory to manage risk. This can be easy as following these rules.

>>> RapidForex.com RULE #1: Thou shalt not risk more money than thou can afford to lose (Also known as "if you can't afford to lose, you can't afford to win."

Let's face it - this ain't bean ball. You will lose money. ALL traders loose money. Stop right here, delete this email, forget about trading currencies, do something else with the rest of your life if losing a portion of whatever money you might trade with would take food off your table, keep your kids from going to college or change your lifestyle. Repeat: there is no system or approach available that doesn't sustain losses sometimes. The trick is containing those losses.

>>> RapidForex.com RULE #2: Thou shalt never risk more than 2% of your margin account on any SINGLE trade (if you have a Mini Account, you may bend this to 5%).

For example, if you have $300 in your account, 2% is $6, equal to a 6 pip move. 5% is $15 or a 15 pip move. With a Mini-account, realistically your risk-per-trade has to be a bit higher than those who trade a 100K (regular) account. Once you get your account equity to $1000 or more then definitely limit your risk to only 2% of your margin account on any SINGLE trade.

>>> RapidForex.com RULE #3: Thou shalt always, Always, Always Use a STOP-loss order.

When you place a STOP order, right along with your ENTRY order, via your online trade station, you've just automatically prevented a potential loss from "running" too far.

Before initiating any trade, if you haven't already figured out at what point you would be wrong and would want to cut your loses or, at the very least, reevaluate your position from the sidelines, then you shouldn't be putting on the trade in the first place.

Show us a FOREX trader who doesn't use stop loss orders and we'll show you someone who loses a lot of money.

>>> RapidForex.com RULE #4: Thou shalt predetermine your exit point BEFORE you get into a trade.

To use a football analogy, if you don't know where the End Zone is what's the point in walking up to the scrimmage line to make a play? In other words, when you place a LIMIT order (or, at least mentally place it), you're telling yourself, and the rest of the market, that you understand the game plan, the big picture, the reason for being on the trade (the football field) in the first place. It is prudent to let profits run and follow a market with stop orders in an uptrending market. But it's the wisest of traders who put such a limit on their selling (profit-taking). Because of Greed, it is always more difficult to make a decision to sell (take profits) than buy. We don't want you to be the one who says, "If only I had sold when...." Know your exit strategy / game plan and this won't be you.

>>> RapidForex.com RULE #5: Thou shalt paper-trade first.

First open a DEMO account and get to learn how to place orders with it (we cover this in detail in Lesson #11). You shouldn't invest real money until you have shown a profit in a DEMO account. Many people have losing DEMO accounts and still believe that it will be different with real money. Wrong! As mentioned in Lesson #11, the only thing different between a DEMO account and a LIVE account is, with a DEMO account, you'll tend to be less-conservative and lacksadaisical with the rules. If you lose paper-trading, what makes you think you'll win with real money?

>>> RapidForex.com RULE #6: Thou shalt take a Breather when your Core Equity is significantly down.

First of all, you should understand the following term "Core equity." Core equity = Starting balance - Amount in open positions. If you have a balance of $10,000 and you enter a trade with $1,000 then your core equity is $9,000. If you enter another $1,000 trade, your core equity will be $8,000. Assuming you lost money on each trade, your core equity certainly won't be where you started it with. If you lose a certain predetermined amount of your starting capital (e.g., 10 percent to 20 percent), take a breather, analyze what went wrong, and wait until you feel confident you have a high probability trading idea/method/system before entering the market again.

>>> RapidForex.com RULE #7: Thou shalt not let thy emotions rule.

This is probably the hardest rule to keep. Yet, we have never seen a successful trader over the long haul who didn't follow it. Most people want to be winners. Most people want to make the big score and have the accompanying bragging rights. We all tend to get greedy, traders usually more so. But trading is a business. It's hard work. You must be cool, calm and always ready for the next opportunity. You can't have emotionally high highs or emotionally low lows because you'll make too many mistakes, and mistakes mean losses. If you start winning and get "too high," the tendency is to over-trade. By that, I mean starting to make marginal trades or "seat-of-the-pants" trades just for the sake of making trades, instead of waiting patiently for the right opportunity. If you get too low (this is usually after some losses), you are liable to skip the trades you should be making, or you might try to "cherry-pick" a system or an advisor's recommendations for fear of more losses, inevitably making the wrong choices. To win this game you must remain patient and clear-headed.

=========================

Finally, to finish this lesson up, we have TWO basic rules about winning in the FOREX as well as in life:

(1) If you don't bet (trade), you can't win.

(2) If you lose all your chips, you can't bet (trade).

Think about it. Hard once. Then softly twice if you have too.