In the learning phase of Forex trading or any other type of trading, many traders end up blowing one or more trading accounts. However, blowing up a trading account is caused by a single problem: inadequate money management.
Now if that trading account is a demo one, that's fine but the main problem I want to underline is the fact that most traders blow up live account containing their own money.
This article will put emphasis on how new traders can manage their money to avoid blowing up their trading account.
A lesson on money management to protect your trading account
Key principle: Do not risk more money than you should.
I believe if you can respect the key principle above, you're on the right track. However, I started trading risking way too much money for every trade.
Let's get into the details…
A phrase you've heard hundreds of times is this: “do not risk more than 2% for a particular trade”. I call it simply the 2% Rule.
Are you doing it?
The truth is that combining a winning trading plan with the 2% Rule will almost guarantee you not blowing up your trading account.
Let say you start with $1,000 in a live account. You would risk 2% ($20) on your first trade. At worst, you'll have $980 in your trading account. If the situation is really bad and you lose all your trades, here's what happens:
Above is an example of what would happen if you were to risk 2% of your remaining account balance. After 20 losing trades, you would end up with a drawdown of slightly more than 30%. In fact, after 20 trades your loss would be $304.86, which isn't dramatic.
The only thing you need in addition to implementing the proper money management is a winning trading plan.
Overall, the key here is to know that risking an appropriate amount of money along with a correct trading plan can't make you blow up your trading account.
Have you ever blew up your trading account? Were you using the 2% Rule? What will you implement to prevent this? Leave a comment below!