Many forex traders start trading live before understanding and learning good money management rules. Develop a few good money management rules and practices them on your demo account before starting live trading. Developing your money management rules mean how much of your money, you are willing to risk on one trade. It also means determining how many contracts per trade your risk tolerance allows?

The important thing when you start trading is to learn how you can improve your investment results by making small changes and tweaks to your trading strategies. Good money management rules can make a huge difference between becoming a successful investor in the long run or an unsuccessful one that blows up the account in a few weeks.

Have you ever played poker? If not, watched it being played online or on TV! If you have then you will never see a good poker player play all his/her cards on a single bet. Good poker players know that by risking only a small percentage of their money on a single bet, they can win and lose. But he/she will still play the next hand. If he/she puts everything on the table on a single bet; it will have to be a 100% sure bet. An impossible thing, you can never be 100% sure. Life is full of probabilities. Nothing is for sure.

You must know this that currency trading is far more complicated as compared to playing poker. You will be dealing with hundreds and hundreds of variables that can affect the markets. What to talk of only 52 cards. You must understand and implement good money management rules in order to succeed at forex trading in the long run.

You can fall into many pitfalls while trading. As a trader you should be constantly guard against two emotions. Greed and fear! In case you are on a winning streak, you will become greedy. You would want to risk more to make one big win and you would want to strike it rich in one or two big trades. This will make you risk more and more of your money on a single big trade.

In case you lose a trade, you will become fearful of risking your money on the next trade. Now, fear will take over and impair your decision making. Fear will make you lose confidence in your judgment and decision making. Lets see how fear and greed can impair your trading results.

Lets suppose you have a run of successful trades. You are feeling overconfident and you are not satisfied by risking only 2% of your account on a single trade. You want to risk more on the trade. The more you have in a trade, the more you will make if you are right. You increase your risk to 5%, you win. You increase it further to 10%, you once again win. You finally decide to put 25% of your equity at risk on a next trade, but misfortune strikes. Your successful run comes to an end. You lose.

Suppose you had a $100,000 account and you had foolishly risked 25% ($25,000) on one single big trade. You desperately wanted to win but lost. Losing $25,000 means you have only $75,000 in your trading account now after your loss. How much you need to make to get back the original account balance of $100,000; you need to make $25,000 again. It means you will have to make 25,000/75,000= 33% in order to get back to the original amount. You risked 25% but now you will need to make 33% to breakeven.

Many investors once they lose a trade try to risk more to recover their original loss, ending up losing more and more. Very soon those investors destroy their accounts and are out of trading forever. There are other investors who try to reduce risk even further on making a loss; eventually they divorce themselves from any opportunity for meaningful growth in their accounts.

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