In the video above we have focused on one of the most commonly accepted wisdoms in Forex trading which is - only to risk 2% of your trading capital on any trade. Many traders follow this advice yet, there is no logic to the set amount and it ignores the fact that Forex trading is a game of skill, where its a proven fact you should increase and decrease order size to maximize profits which we have covered in another article. Risking 2% doesn't decrease risk or increase reward, on a trading account and is just a figure people accept without questioning it.
The 2% rule is presented by media pundits, brokers and gurus, to make Forex sound a “safe investment” but its not a safe investment – its a high risk reward speculation and should be seen as such. Today though the Forex industry promotes to anyone and investors are lured in with enticing ads and the promise of making money like the pro traders do but the idea of a novice with no training making big profits with low risk is simply not correct.
Forex Trading Involves Risk BUT
In terms of money management the idea of risking 2% from trading signal entry to stop loss is the road to disaster for most account sizes from retail customers are below $1,000 so they risk $20 per trade – these traders just get hit again and again on stop as its to close and their equity is eroded to nothing. Mind you, these traders mostly have no education and therefore no trading edge but even traders who take the time to learn Forex trading accept the 2% rule without question.
If you want to win and make a reasonable amount of profit on a small account you, need to risk more and be at a level your comfortable with which should be above 2% and give a reasonable distance back to the stop loss order so that your not taken out the market by small corrective moves in price and of course vary the risk per trading signal in relation to account performance and how you view the trade set up on the chart.
Other Money Management Myths
Many Forex also think diversifying across a number of contracts also reduces risk – it doesn't and this is because any trading signal has the potential to become a loser. There are numerous other money management wisdoms which are wrong and the one I hate is to scale into a trade which is going well and create a pyramid effect so when you do this, any retracement of reasonable size, your stop will to to close and you will get for minor profit or a loss. Scaling up a trade is not for small accounts with tight stops – period.
Forex its Risky But That's Why it's So Profitable
In terms of Forex trading forget the media, the gurus and brokers who tell you that you can trade like the pros with no real education and following commonly accepted wisdom – you can't. You need an education and an edge and this means seeing the Forex markets for what they are – a high risk speculation which can give you big profits. In terms of money management myths, the above ones we have just looked at are commonly accepted and cause traders losses – so avoid them.
In terms of achieving success in currency trading look beyond the view of the majority, who lose and ignore commonly accepted wisdom you read and you can become a winner, run with the pack and you will lose – that's the reality of Forex trading.