Forex Crunch Proper Money Management Will Make Forex More Mainstream

Proper Money Management Will Make Forex More Mainstream

Posted: 02 Jul 2010 01:53 AM PDT

In the third article about making forex more mainstream, we’ll examine the role of money management – a buzzword often heard but rarely practiced.

Previous article: Forex Education – The First Step to Make Forex More Mainstream.

Previous article 2: Forex in Banks – Essential for Bringing Forex to the Masses

With stock portfolios, people are advised to have diversity – putting some money in solid stocks, some in small cap stocks, some in bonds, etc. High risk portfolios usually consists of a larger portion for “up and coming” stocks.

Even with such portfolios, the chance of having one of these stocks erase all their value is quite rare. With no leverage, the chance of erasing all the portfolio is even more rare.

In forex, the story is different. Receiving the infamous margin call is quite common. With most traders losing, they rarely withdraw their funds after a few bad trades. Burning out the account is much more common.

This huge gap between stocks and forex trading is due to bad money management, which is usually the result of high inconceivable leverage. Let me make it clear – I support the brokers’ right to allow a high leverage. The NFA limits of 100:1 seem right to me, and the proposed leverage limit of 10:1 from the CFTC is draconian in my eyes.

But high leverage doesn’t mean you have to use it. The basic rule of money management is not risking too much of your account in every trade. If you don’t want to deposit a big sum in your forex account, you’ll have to accept trading with smaller sums – lower leverage.

Brokers have a big role in the current state of money management and can make a difference . Those brokers that emphasize the high leverage, aren’t contributing to the maturity of the industry.

Opening a small account and utilizing the high leverage, will lead most traders to a quick burnout. Those traders will recommend others to stay away from the industry. Traders that utilize a small leverage, will make more trades, have room to learn, succeed, and win trades after losing some.

Those traders that trade longer not only have a better chance of eventually withdrawing funds from their broker, but also recommending it to others and indirectly making the industry more mainstream.

As in the post about forex education, website owners like myself have to educate about this subject.

The web is packed with technical analysis. Also articles about trade psychology are important and they can be found easily. Money management is found mostly as a buzzword, but isn’t thoroughly discussed. I will do my best to raise the issue and discuss it more thoroughly and I hope that others will do it.

Ready to connect with real Forex traders? Currensee is the first Forex trading social network.

Forex Daily Outlook – July 2 2010

Posted: 01 Jul 2010 02:00 PM PDT

US Non-Farm Payrolls expected drop, followed by US Average Hourly Earnings and Factory Orders highlight the events today. Here's an outlook on the week closing events.

In the US, Non-Farm Payrolls: The number one event in forex was worrying last month. A big jump was recorded – 432K, but this came almost only from the public sector the government's hiring for the decennial census. Private sector growth was weak. One point of light was seen though – the unemployment rate unexpectedly dropped to 9.7%. Without government aid, Non-Farm Payrolls are now expected to correct and drop by 103K. The unemployment rate is expected to rise to 9.8%.

More in the US, Average Hourly Earnings a leading indicator of consumer inflation gained 0.3% in May. A lower increase of 0.1% is expected now.

Finally in the US, following an eight consecutive month rise, Factory Orders expected to drop by 0.5% indicating deceleration in the US market.

For more on USD/CAD, read the Canadian dollar forecast.

In Europe, The unemployment rate across the 16 countries that share the euro hit a record 10.1 per cent in April, with almost 16 million people out of work a similar figure is expected now. Italian Monthly Unemployment Rate anticipated 8.9%, 0.2% higher than in May.

More in Europe, Producer Price Index expected to drop from 0.9% to 0.3%. The Producer Price Index released by the Eurostat is an index that measures the change in prices received by domestic producers of commodities in all stages of processing (crude materials, intermediate materials, and finished goods). A high reading is seen positive (or bullish) for the EUR, while a low reading is seen as negative (or bearish).

For more on the Euro, read the EUR/USD forecast and Casey Stubbs' latest analysis.

In Great Britain, Halifax HPI reached -0.4% in May, weaker than the 0.35 expected and -0.1% prior reading a similar figure is expected now.

More in Great Britain, Construction PMI: an index based on surveyed purchasing managers in the construction industry expected to reach 58.6 points – 0.1 higher than the previous month reflecting favorably on the market.

Read more about the Pound in the GBP/USD forecast.

That’s it for today. Happy forex trading!

Want to see what other traders are doing in real accounts? Check out Currensee. It's free.