Avoid most common mistakes when trading on the Forex.
Most of the beginners make mistakes regarding money management, but some of the mistakes are a common thing for all of them. Here you will learn what not to do in order to skip making unnecessary mistakes that could lose you lots of money.
Many brokers will give you information in various articles about how to keep your money, but you will see here that those advice are just a way to make you lose your money slower, in order to allow brokers to manage with your money for a longer period of time.
Here you will learn how to effectively manage your money, and thus raise your earnings on the Forex. First, we will see what are common mistakes and myths about managing your money.
Focusing on pips
You have probably read about the importance of focusing on pips gain or lose rather than dollars gain or loss. They say this is important because it will drive you away from thinking about your money as money, and you will think of it as a game of points, or at least “just a job”. Well, it is a job, and the point of having a job is to earn money. So why wouldn’t you think of money as money? This is a business as any other, and the assets you trade are goods like any other. The risk in this business is basically the same as in any other business, so you should not consider your money to have less value in terms of stability and perceptibility, and thus switch your focus from it and regard it as some “points” in a game. No – it is money. And another thing, it doesn’t mean that if you risk a large number of pips that you also risk the same value in money, neither if you have a tight stop means that you risk a small amount of money, because every trader deals with a different position size.
Risking 1% or 2% on every trade is a nice way to manage your account
This myth is the one you have probably heard to be the best advice. Well, it simply said – isn’t. Majority of retail Forex traders start with account worth $5000. Now, they tell you to lose your money slowly; actually they tell you it is good to risk a certain percentage of your account worth. Consider an example that you start with five losses in a row, and you traded with a risk of 2%. After 5 trades, it will leave your account with $4,519. Now, you see, the percentage is getting smaller in amount. 2% of 5 grand is larger than the 2% of 4.5 grand. Of course, the point isn’t to lose, but if you start with negative turnouts, it is actually better to double your risk. In the case of a losing streak, people usually start making the terrible mistake of over-trading believing that it will get them their money back quicker.
Wider stops risk more money than smaller stops
This is obviously not true, as we are mentioning it. This mistake is being repeated due to being unfamiliar with the Forex positioning size. Concept of position sizing is about adjusting your position size or the number of lots you are trading in order to meet your targeted stop loss position and risk size. In example, you are risking $200 per trade with a 100 pip stop loss you would trade 2 mini-lots per pip, (100 pips) that is $200. If you adjust your position size down, to 1 mini-lot instead of two, you are still dealing with a $200 trade, with 200 mini-lots.
Now, let’s have an example where two traders risk the same amount of lots in the same situation. First trader risks 5 lots with a stop loss of 50 pips, and the second trader risks 5 lots, but with a 200 pips stops loss because he thinks that the trade won’t go 200 pips against him. Now, it the trade goes against traders with increasing momentum, the first trader has lost 5 lots with 50 pips, which is $250 and trader be in the same situation also lost 5 lots, but with 200 pips, which is $1000. This clearly shows that widening stop loss doesn’t help you save your money, because this stand that a trader makes is a defensive anyway. It is not a good defensive strategy.
Analyzing the market versus the risk-reward ratio
Many professional trades concentrate on considering risk-reward ratio instead of analyzing the market. That’s because trading is about probabilities and managing your capital. If your experience tells you that you strike rate is about 50%, than that’s the opportunity to be successful if you implement risk-reward ratios.
Obviously some will point out that $ risk system drowns down faster, but it also recovers faster, way faster. So this in theory might sound like both methods have some benefits, but in reality, you want to hit wins and you need ways to win, not the ways to “not lose too fast”. This is not about losing your money, it’s about getting money.