Learning Tough Lessons

Traders can avoid this fate by controlling their risks through stop losses. In Jack Schwager’s famous book “Market Wizards” (1989), day trader and trend follower Larry Hite offers this practical advice: “Never risk more than 1% of total equity on any trade. By only risking 1%, I am indifferent to any individual trade.” This is a very good approach. A trader can be wrong 20 times in a row and still have 80% of his or her equity left.

The reality is that very few traders have the discipline to practice this method consistently. Not unlike a child who learns not to touch a hot stove only after being burned once or twice, most traders can only absorb the lessons of risk discipline through the harsh experience of monetary loss. This is the most important reason why traders should use only their speculative capital when first entering the forex market. When novices ask how much money they should begin trading with, one seasoned trader says: “Choose a number that will not materially impact your life if you were to lose it completely. Now subdivide that number by five because your first few attempts at trading will most likely end up in blow out.” This too is very sage advice, and it is well worth following for anyone considering trading FX.