Here we will look at 6 x money management mistakes which are made by traders which will not only slash profits, they can also wipe out trading account equity quickly so let's look at the key errors traders make in more detail.
I I Can Afford to Lose My Deposit So it Doesn't Matter If I Do
Today I have seen Forex brokers let traders open a trading account with 10.00 and even many of the bigger ones will let you open an account with a hundred dollars. Let's face it there is little or no chance of winning on these small deposits its simply a gamble and traders treat it as such. The general accepted market wisdom is you shouldn't risk money you can't afford to lose. Many traders think this statement means – if I lose it won't make any difference to me at all but by taking this attitude, they are not respecting there cash and will not be fully focused on making trading profits.
Now I agree that, you shouldn't risk money which if you lost it would effect your day to day life and that of your family but you should be risking money which will hurt you a bit if you lost it; if you don't value the money in your trading account and want to look after it and increase it you will lose it. So when you start trading, deposit an amount big enough to give you, a realistic chance of making money with your trading strategy and make sure you feel hurt if you lose it which will keep you focused on increasing your account equity.
Placing Stops to Close to Trading Signal Entry
I have written a lot of info on this already in other areas of the site, in relation to day trading and scalping so we will only cover it briefly in this article. The key point to keep in mind is - if you place your stop to close to the entry of your trading signal, you will just get hit by the normal ebb and flow of Forex prices which occurs in short periods of time. So make sure, you have your stop loss order outside of this normal ebb and flow.
If you think a 10 pip stop will work in a currency pair which is moving in a range of a 100 – 200 pips a day, you need to learn about standard deviation of price and volatility and also why day traders always lose money. Your stop loss needs to be far enough away, not to get picked off by the market so trade longer term time frames and use support and resistance levels on daily and weekly charts to decide stop loss placement.
Placing Your Stop in a Cluster
Even when you look at longer term time frames you need to avoid having your stop where there are stop cluster which can be hit in the short term which will take traders out of their positions but the move will then go back in the direction these traders were trading.
This very often happens and is basically rooted in human psychology. Traders pick a level of support or resistance and put their stop right behind it. The stop is normally around 10 pips or so from entry – the market comes to the level, takes them out and then the trend continues. Why dies this occur?
The answer is – 95% of traders lose with their strategies so you CANT trade like the majority. The price very often immediately reverses, after these stops have been triggered which makes many traders think their Forex broker did it to make money from them but this is not so – the market did it to them. The market simply moved and took out a stop cluster at an obvious level. Sure you need protection but when you place, a stop loss order think about, where are the majority of traders stops? If you look at your charts, you can work out the level and make sure your stop is not with the majority.
Moving a Stop to Break even ASAP
This is an obsession with Forex traders and the logic is – if you move the stop to break even, you have a risk free trade which is true but its just on 1 trade. If you do this often enough you will find you are getting stopped out on these trades more often than you would if you moved stops in line with the market action – trades which should have been winners, are stopped out at break even bringing down the ratio of winning trades. This not only will impact on profits but can cause losing trades to exceed, your reduced number of profitable trades.
Do NOT move stops to break even unless there is a reason on the chart. This is because to move a stop to break even, to create a risk free trade is one of the dumbest things, you can do in any trading strategy.
Leaving Stops and Targets Set at Time of Entry
Many traders set a target, enter their trading signal and offset it with a stop loss order and wait for their target or their stop to be hit and forget, that this is an opinion on the trade at a certain snapshot in time and the set up will change as the market moves. Don't just set and forget your trades – you need to update your stop and your target each day in light of the market action as it unfolds. Professional traders, review their chart set ups and trades everyday and you need to do this, if you want to enjoy long term currency trading success.
Not Managing Account Equity
Your looking to build your trading account equity up over time and individual trades, need to be monitored in terms of how correlated they are overall and how much risk they give the account. Focus on managing your account equity in terms of - overall risk exposure, open profits and correlation of currency pairs. Many traders focus on open profit and get to exposed for example, when doing well and then see a number of correlated trades go against them which wipes out their trading account – don't make the same mistake.
The above 6 mistakes, are very common especially with beginner traders but their easy to avoid. If you do avoid them, you will increase your chances of making some great Forex profits on your account.