Forex Money Management – the Biggest Mistake Traders Make
Forex money management is the key to making money in Forex trading and if you don’t get it right you will lose and here we will look at the major mistake traders make.
Most traders are so obsessed with avoiding risk, they actually create it. This needs some further explanation, so let’s look at how most traders risk control causes losses and the traders fall into 3 groups.
Group 1 – The Day or Short term Trader
There is a group of traders who think that day trading and scalping, is a great way to restrict risk, so they trade the daily range with tight stops. The problem is all daily volatility is random, so you can’t key off support or resistance levels and the trader gets frequently stopped out. These traders’ profits are so small, they never cover their majority of losing trades and that means a wipe out of equity.
Group 2 – The Forex Robot Trader
Another group trust the numerous junk robots that are sold online. The Forex Robots money management systems are either, non existent or take far too much risk per trade. What most traders don’t realize is the track records are created in hindsight and to make a profit on paper, the vendor bends the rules to fit the data and this is always at the expense of money management.
Group 3 The Trader Who Places Stops Within Random Volatility
Another group get a profit and as soon as they have a profit, they move to protect it by moving their stop to close and get clipped out of the trade, because the stop is to close. They get stopped out early, but had they held their stop back and accepted a drawdown into open equity in the short term; they could have held the trade for longer and banked a far bigger profit long term.
In Forex trading, you have to trade longer term time frames, accept risk as part of trading, place your stop outside random volatility and trail them slowly. The simple fact is you cannot make big rewards, without taking a calculated risk.
If you want to win at Forex, you need an understanding of stop placement, as it relates to the standard deviation of price of the currency traded. We will look at this in relation to Forex money management, in more detail part 2 of this article series.
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Basic FOREX Money Management
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