Most traders see forex money management as little more than placing a stop but it's a lot more than that here we will look at money management mistakes and how to avoid them.
1. Trading invalid Time Frames
It doesn't matter how good your system is, if the time frame is to short you are trying to trade in - you won't win. Retail traders think they can cut risk by forex day trading or scalping, the theory is it means low risk.
The reality is it's the highest risk form of trading because - daily volatility is random and your odds on to lose.
Don't fall for the myth of people who try and tell you day trading works - it doesn't sure, you see loads of simulated track records in hindsight from vendors but there is big difference between making money knowing the closing prices and not knowing them.
2. Cut Trading Frequency & Risk More
It's a fact most traders think the more they trade the more they make however the opposite is true, trade to much and you end up taking risks on marginal trades.
The fact is you can trade less than a dozen times a year and make 100% + gains. You don't get rewarded for frequency, you get rewarded for being right with your trading signal so, cut back your trading and then do this:
Risk as much as you can afford on the highs odds trades. Your better off risking 10 - 20% of your equity on these than the normal recommended 2 % on lots of marginal trades. Keep in mind if you don't risk much you won't make much, you need to take calculated risks at the right time - Now finally, and you need to avoid this:
Diversification! Sure it spreads your risk but in most instances it dilutes your gains to nothing on a small account. If you have a high odds trade you believe in don't dilute your profit potential.
3. Stops within Random Volatility
Many traders want to restrict risk by locking in profit by trailing a stop - sound theory but the way NOT to do it is to put stops within random volatility. Don't know what random volatility is? Then you need an understanding of standard deviation of price so make part of your essential forex education.
In essence you need to keep your stop far enough but to keep you in the trade yet close enough to protect you - most traders get this wrong. They trail there stop to close and rather than making a huge profit - they bank a marginal one.
When the big trends come around - you milk them not for hundreds but thousands or tens of thousands. Big trends are there - look at any forex chart your challenge is to turn them into profit.
If you thought this article was going to show you a way to take miniscule risks then you may be disappointed but the reality is:
Forex trading is high risk and your forex money management strategy should be all about taking calculated risks at the right time and making huge gains.
If you want low risk put your money on deposit - if you want to take calculated risks for triple digit gains, the above tips can help you.
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