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Don’t trade the money you cannot afford to lose
Written by: PaxForex analytics dept - Saturday, 31 December 2016 0 comments
As traders, we are always focused on finding profitable trading opportunities. After all, the point of trading is to make money. While profitability is clearly the ultimate goal of all trading activities, it is also important to focus on risk management. Trading the markets is risky no matter how you approach it. While you cannot completely eliminate this risk, you can limit your exposure to it. Before you enter any trade, you should have a plan that dictates exactly how much you are willing to lose.
A very common factor that applies a lot of pressure on traders is using money they can’t afford to lose for their trading. You may have heard stories of people who traded with loans, or money intended for important purchases, and ended with tragic consequences. Taking a loan is the very last option (if at all) to finance a trading account. Using your essential-to-living funds sees you unavoidably attach an emotional factor to your trading positions as a loss could mean big trouble.
You need to determine if you can even afford to trade. Forex trading should only be done with risk capital. Risk capital is money that you can lose.This is the kind of money that if you
lost, you wouldn’t lose your home, car, spouse, limbs, electricity, etc. Don’t risk what you can’t afford to lose! If you’re playing with money that you need to pay the bills, it will have a huge negative impact on your ability to make objective trading decisions.
The trader who can’t afford to lose shouldn’t dare taking the same kinds of risk as the rich trader who could easily do without worrying. This could cause him to lose his money, which is something that cannot happen. The trader who cannot afford a lot to lose should only invest on extremely low risk investments which brings extremely low returns. The rich trader on the other hand can place a number of semi safe investments and he might end up losing a few but making a huge profit off the other ones, and thus his capital grows much faster.
Trading with a live account without having either the proper education or experience is a notoriously common way of adding undue stress on your trades. Carrying out any type of task without fortifying yourself with knowledge, or experience, inherently adds pressure because it is simply more difficult to carry out that task. However, a well-trained individual is confident and disciplined enough to focus clearly and coolly on the task at hand.