Fatal Mistakes in Money Management
It is common knowledge that money management is one of the most important components in forex trading. Not having money management can even be said to be a trader's biggest sin. Without the management of trading funds, no matter how good a strategy is, it will not guarantee the continuity of your trading. A high probability of profit does not guarantee a large profit and cannot minimize risk. If you don't believe it, try studying this problem in the article To Be Profitable, It Doesn't Have to be True.
In its use, money management can be applied with various rules and in various ways. Each trader is free to choose which method is the best and best suits his style, preferences and risk settings. There are those who simply follow the 1% rule, use the Risk/Reward ratio, and apply the Position Sizing technique. Whatever your choice, there is no better or worse money management method, because it all depends on the condition of the user. In addition, you should avoid the following 3 fatal mistakes when setting up money management:
1. Set Money Management With Target
Having a target is sometimes good, but in forex trading, focusing too much on the target tends to be dangerous. Some examples of targets that amateur traders usually make are:
- Profit percentage in a month.
- How much profit is generated in a number of trades.
- How long will it take to reach a certain amount of Dollars.
Although different, the three targets above are actually based on the same thing: the desire to make money in a short time. In fact, in trading there is no definitive answer that can guarantee the achievement of these targets consistently. Why is that? Take a look at your trading chart, then notice how volatile the price movements are. Besides being dynamic, prices cannot be predicted with certainty.
Technicalists may say that price patterns will always repeat themselves. But in reality, prices are not only driven by technical factors, but also fundamental issues that affect market sentiment. Therefore, it is impossible to set a profit target of a certain percentage in one month and hope that this standard can always be met. Unfortunately, this is still done by many traders. The demand for pursuing the target actually stems from an error in managing money management. Before choosing a suitable method, many traders set the desired target first. As a result, they will implement their strategies and methods to pursue these targets, which in turn can lead to violation of trading rules and lead to overtrading. When setting up money management, you should not set targets at the beginning of trading. Use the profit growth scale calculated at the end of the trading period as an indicator of success. For example, after 6 months of trading you were able to generate 15% growth, and in the next 6 months, the growth increased to 20%.
Thus, you are not required to meet the targets set at the beginning, but only to evaluate performance at the end of the trading period. If it is not good, then you can correct the error to increase profit growth in the next trading period. The method above will prevent you from pursuing a target trading style, because from the start there is no predetermined profit standard. Such a technique is also in accordance with the principle of experienced traders who do not force trading when market conditions are not favorable. When there is no target being pursued, you will not look for opportunities in a market that is not conducive. The implementation of the strategy can be maximized, the trap of overtrading can be avoided.
2. Using Pips
Have you heard the sentences above? If yes, then don't be fooled by the number of pips mentioned, because profit and loss are still very relative when measured in pips. Just because you're used to hearing analysts or other traders say profit and loss in pips, doesn't mean you're also advised to use it when managing money management. In fact, pips only reflect the size of the price movement, not the actual profit amount. One pip for a standard lot user is certainly different from a micro trader pip. Traders who claim to be able to profit 500 pips without mentioning large profits in Dollars can't really count on their credibility, because they may only use small lots. If true, then the context cannot be compared to a trader who can profit 500 pips with a large lot. However, trading volume is very influential on the psychological aspect. Small lot traders can easily risk 500 pips, but big lot users need tremendous courage to endure it.
Learning from these differences, it's a good idea to start leaving the pips unit when setting up money management. Instead, make it a habit to calculate profit and loss directly in Dollars. When you plan the Risk/Reward Ratio, for example, don't just pay attention to how many pips are specified, but also take into account how much the amount is converted into Dollars. Knowing directly the size of the profit and loss also makes it easier for you to apply the 1% rule. For example, your capital is $ 5000, meaning that each position should not be burdened with a risk of loss of more than $ 50. To comply with these rules, obviously you cannot calculate Stop Loss in pips only. There must be a conversion to Dollars for you to realize the 1% rule. Calculating the dollar value per pip is quite complicated because it involves lots, the type of pair, and the base currency used. You can learn the conversion formula here, or use the pips calculator to get the calculation results automatically.
3. Adjust to Capital Ability
Forex trading can indeed be started with only $ 10. But is it realistic if you use it to trade with standard lots? Even with 1:1000 leverage, the money is still less than the margin required to open one EUR/USD position. In order not to mistakenly determine the lot and limit the opportunity, then adjust the lot size to the size of your capital. It is important to ensure the resilience of sufficient funds. Don't let the remaining free margin be so minimal that the MC can be triggered when the new price moves slightly against your trade. If your capital is still small, use small lots such as mini, micro, or even nano (at the broker that provides) to get sufficient funds. If you later manage to accumulate experience and consistent profit, then the lot can start to be increased little by little to grow profits. Most experienced traders who use standard lots today also start trading with little risk. If the risk is successfully minimized, then the continuity of the funds will be more secure and will open up opportunities for them to grow profits gradually. As the wise words out there, trading is like running a marathon, not a sprint.
Note:
Comments
Post a Comment