4 Money Management Mistakes That You Don’t Want to Make
One of the main driving forces for Forex traders is to escape the confines of their daily monotonous grind. We all fantasize about breaking free of conventional jobs and experiencing freedom while making money from our computers.
But, does that mean you can just sit on your couch and casually press buy and sell buttons while watching Game of Thrones?
Probably not. The reality is, you’re leaving a world that you’ve been raised to survive in and jumping into one that nothing has prepared you for. In Forex, a different set of rules exist.
As a trader, we know in the back of our minds how important risk management is – not only for our account’s health, but our mental health as well. Get it wrong and you will take a nose drive financially and emotionally – get it right and the returns will naturally flow in.
The approach of the average trader makes it very difficult for them to ever earn profits or sustain real growth from Forex trading.
I talk with a lot of traders everyday, and there seems to be a few common mistakes that keep reoccurring. Today, I wanted to talk about risk management, and highlight some of foundations you might be building your money management ‘mentality’ from, which could be harming your chances of getting where you want to be.
Don’t Be Money Goal Orientated
Some of the most common questions go a little something like this:
- Can I make 10% per month?
- How many signals per week can I expect?
- How long will it take to double my account with $1000?
All these questions really have a strong focus point – the urgency of making money really fast.
The big issue I have with these kind of ‘goal orientated’ questions, is that you really can’t definitively answer them the way the trader ideally wants them answered.
The market is a dynamic environment. One month could be absolutely pumping, and be ‘easy pickings’ with very lucrative trade signals. The following month could be a complete dead zone, where price consolidates, churns in low volatility, and doesn’t allow you to make any money off price movements.
Don’t try to force rigid monetary, or money management goals on a fluctuating environment. How are you going to meet your criteria if the market flattens out?
Picture this, you’re on the last week of the month:
What are you going to do if you’re no where near close to completing your ‘monthly quota’? How are you going to respond to the self-inflicted pressure you’ve placed on yourself to reach your monetary goal?
With a sense of urgency, you may feel the need to be more aggressive and start forcing trades out of the market, trades that you wouldn’t normally pull the trigger on – but you feel like you need to take decisive action under this pressure.
The best way to remedy this is to not set any goals at all, instead concentrate on becoming an excellent trader who is a ‘master chart reader’ and manages risk very well.
Just learn to embrace what the market offers you.
Only take action when the market offers your system’s trade signal, you know the ones that provide an edge with the probabilities in your favor. So limit yourself to them.
No signal = No trade.
We don’t like admitting that we can’t predict or control what’s going to happen every single time we look at the charts. Sometimes the markets are just noisy and very hostile to trade in, and it is that simple. They become a black hole, you keep throwing money at it, and it gets consumed in consolidation.
Some months you will do well, others you may not see any gains, or even suffer a loss. The last thing you want to do is define your success with absolute numbers leading into self-inflicted emotional pressure, and a negative self-evaluation if they are not met.
The Forex markets are not really designed to send your financials into the stratosphere at breaking speeds. If they were, there would be a lot more Ferrari’s on the road.
If you try to make money fast, you will be taking on incredibly elevated risk – and most people find themselves on the wrong side of it.
Measuring Success in Pips
If you stop by any public forum you will see traders measuring their trade outcome with pips, or ‘how many pips they are up or down’ for the day.
It’s become the social standard for Forex traders, we’re all used to talking with each other in this fashion, using pips as a reference point for performance.
But, the truth is it isn’t really the correct way for a serious trader to assess how well a trade went, or to evaluate risk.
Pips are just a measurement of distance on the price chart – catching the move is great, but what is more important is how the trade was setup in order to catch the move.
You see, a pip to me will have a different meaning to you, and a different meaning again to another trader. Pips are relative measurements and have relative values.
If you ‘make 150 pips’, but your stop loss was set with a distance of 500 pips – it’s a negatively geared risk/reward trade that doesn’t give you any bragging rights.
Above the example trade is illustrated – It becomes clear how suicidal this type of negative geared trade setup is. You’re risking more pips, in order to make a few.
So you might think someone did already because they ‘won 100 pips’, but if they told you they risked 500 pips to get it, you might hold back the applause.
Also you have to keep in mind a 100 pip move will look very different on say the EUR/USD compared to the EUR/AUD, and different again on Gold. If you seen the EUR/USD move 100 pips, it wouldn’t be uncommon to see the EUR/AUD move 250 pips in the same day. Gold can easily move 2000 pips in one session, and when you compare all the charts side by side, they all look very similar despite the drastic differences in pip movement.
Even though both candlestick charts look the same – they move a drastically different amount of pips for day. Gold moves 10x as much as the EURUSD, but you wouldn’t pick that just by looking at the candlesticks.
100 pips on the EURUSD is not the same as 100 pips on Gold.
Again, pips are a relative measurement and aren’t really comparable to one another across different markets.
To throw things out even further – Pips also contain a ‘pip value’ that is unique to each trade.
A pip value is determined by the:
- lot sizing of your trade
- the quote currency of the instrument you’re trading
- the currency your account is in
If your trading account has USD in it – then any pair that has XXX/USD will have a pip value of $10 per lot. If you where using AUD in your account instead, and trading a XXX/USD pair, then the pip value will be determined by the AUD/USD exchange rate and the lot sizing of the pair you’re trading.
Let’s say GBP/USD was opened with 5 standard lots, and the trading account contained USD – then each pip would be worth $50. The trade would increment or decrement $50 for every pip gained or lost. A 100 pip move ‘in the money’ would put you ahead $5000.
Compare the same situation to another person who takes the exact same trade but uses Australian Dollars instead – the ‘pip value’ will be different, and you need to make up this difference by adjusting your lot sizing to compensate. I won’t get into the math here, that’s all covered in our Price Action Course.
So, when someone tells you that they won 200 pips on their trade – it really doesn’t mean much. If it was the EURUSD, the move was pretty decent, probably a good trade – but if the trade was on Gold, it is much less of an achievement.
Remember, the real measure of a trades success is how much return on investment you were able to get out of it.
The bottom line for trading is money – we’re not trading with magic beans here, we’re looking to make $$$. So, the final outcome of a trade’s performance needs be counted as return on investment.
If you had to risk $1000 to make $100 – then you’re flirting with an account meltdown. If however, you risk $100 and make $1000 you’ve done well, banking 1000% ROI. These sort of trades can happen, I got about 900% ROI on this trade.
We all know to fit into the social crowd, you’ve got to fall back to the classic way of talking about pip moves here and there, but when it comes recording your own data, don’t be a pip counter when measuring your success.
How many accounts have you severely compromised or totally wiped out, because you just were not happy with the profits you were making, and decided to amp up your risk to over compensate?
A serious Forex trader knows trading should be treated like a business. New businesses in general have a high failure rate, not just Forex ventures. Even the online startups or the classic brick and mortar stores have a poor success rate.
One of the most common failures for a small business is under capitalization – not having enough money.
The ironic thing with Forex funding is that you can ‘start up’ and operate with small amounts of money. Technically you can trade with initial investments from as little as $100!
Having said that – if you want Forex to generate you $500 a week from a $100 start up, then you’re very under capitalized!
Under capitalization affects a trader deeply on the psychological level.
Under capitalized traders want the high income they desire, but don’t have the account power to make it happen so they are likely to risk more and over expose themselves.
This can lead to a quick wipe out and a frustrated, angry trader.
It’s best to have realistic goals, and save up the money that you really need to be able to generate the kind of returns you want to see. If you aren’t satisfied with what you’re achieving – you’re most likely going to ‘turn up the dial’ to try move the needle more quickly.
Don’t be the one who overexposes their account to massive risk under desperation to hit ‘the big win’. This is a gambling mentality that provides the wrong frame work for a trader to develop their mindset.
It’s better to start up with investment capital that you don’t have to worry about living off of, then you can just concentrate on growing it with good risk management. Once it reaches a certain threshold you’re happy with, you might make the decision to start pulling out money from time to time.
Once you’ve gotten used to the occasional withdrawal and you’re still able to maintain account growth – then you can consider jumping over to full-time trading.
Cutting Trades Off Too Early
One of the quickest ways to shoot yourself in the foot is to become the ‘Forex micro manger‘ – the trader who sits there making many fine tuned adjustments to their open positions.
Sometimes you may feel like you need to sit there and babysit your trades and nurture them into profit, or cut them loose if there are any signs of negativity.
You think you’re the caring mother, but what you’re really like is the crazy doctor performing ‘open trade surgery’. Stop ‘hacking’ into your trade and scarring your account.
When a trader makes adjustments to their stop loss or moves a stop loss to break even – or does anything that is outside of the original trade’s plan, it will generally result in an unfavorable outcome.
Don’t sit there and watch your floating P/L, every tick will boil up more and more emotions – especially when the trade ticks against you. By doing this, you are more likely to close a trade based off emotions even when there are no clear exit signals.
Think about all the times you’ve tampered with your open trades and all it has managed to do is deprive you of potential profits that you would have otherwise collected.
Price won’t move in the straight line you want it to. Instead it moves in wave like motions, or a zig-zag kind of pattern. It’s only logical to expect a trade to phase in and out of profit as the market gradually moves where it wants to go. This is the basic principles of swing trading.
Do yourself a favor, set your trade up in a logical manner that you’re confident in and then just walk away. Close your trading terminal down and don’t even look at it until the next day.
This ‘set, forget & collect’ system will do wonders for you, financially, mentally and emotionally.
One of the best ‘hands off’ approaches is to use ‘end of day signals‘, then set and forget them. A lot of traders use this approach to work their trading into a busy life schedule.
A trader could check the markets at a key time, like at the end of day New York close, place their trades and continue with their normal daily routine – like a day job, study, look after the kids, etc.
When you take this hands off approach, it really removes the risk of making those deadly ‘mid-trade’ decisions – and you can catch some really strong market moves with little effort as a result.
I am a big fan of keeping Forex simple by putting less effort into trading, setting trades up, and letting the markets do the rest of the work for me. It’s a good feeling when you only take 15 minutes of your day to analyze the market, set up a trade, and it turns out to produce 600% ROI.
If you would like to learn how to put less effort into the markets, but reap more rewards – you should have a look at the War Room Membership which contains our Price Action Course.
I have 3x money management models inside the course. One specializes in removing risk from the market very quickly, so you can have open trades open with zero risk to your capital, another is a more aggressive pyramid strategy, which is for experienced traders seeking a profit multiplication strategy.
We also have ‘set, forget and collect’ trade builds, as many of the war room traders also have busy lives they need to work around. Set, forget, and collect trading works very well, but if you like to be a bit more active then we do have London breakout setups and the chat room is always buzzing with intra-day trading discussion.
I hope you enjoyed today’s article, please leave a comment below and let me know if you’ve caught yourself in some of the behaviors we’ve discussed today.
Good luck on the charts this week, talk soon.
Although trading may appear easy, the whole concept of buying low and selling high might seem simple enough, trading is actually one of the most difficult challenges you will ever face in your life. A lot of traders jump in the markets with their hard earned money and drop off the radar pretty quickly. The high failure rate of traders is mainly due to the fact that to be a successful trader, you need to forget everything you’ve learned in life and build a completely new mindset. One which is completely different to what our everyday life experiences have taught, and moulded us into. There are 4 very common ‘red flags’ that seems to be somewhat of a common denominator amongst the losing crowd ...Trading with no rulesProbably for the first time in your life you have complete control of what you do. Forex trading was so appealing to you, because the freedom gave you the sense that you discovered some sort of ‘Utopia’. The thought of breaking free of all the rules from your daily life is everyone’s ‘holy grail’ lifestyle dream. As heart shattering as it might be, even with Forex rules still need to exist and define your trading!Not only do you have to set your own rules, it’s up to you to remain disciplined enough to trade within the boundaries you’ve set yourself. If you can’t follow your own rules, not only will you be punished, but your family and loved ones may suffer as a result from your actions.When you are absent of a trading plan you’re just ‘guessing’ when to jump in without understandingthe move. You need to find a trading system that suits you and your lifestyle, create yourself some guidelines and stick to the plan. This may require you discipline yourself to sickening levels but it’s either that or become another statistic.You haven’t embraced riskMost traders consider themselves ‘risk takers’ because every time they open a new trade there is a chance it won’t work out. Most of the time traders don’t really accept the risk they are taking on though. Whether you fully understand the risk associated with your trades or not will have a major impact on your trading performance.If you can’t place a trade absent of fear, then you haven’t accepted your risk. Trading with fear is dangerous in the sense the fear will play against you the while the position is open. You probably won’t be able to sleep at night. There will be that urge to stare at your open trade and emotionally intervene.To build a winning traders mindset, you must always think worst case scenario. You should know how much money you’re risking before you open a trade. It’s a good idea to consider the money already lost as soon as you open the trade. This way you won’t be so disappointed if the trade really doesn’t work out. If it does, then that’s just a bonus.You’re focused too much on moneyWe see all these advertisements encouraging people to trade Forex, backed with pictures of expensive cars and nice houses. As you’ve most likely discovered these adverts are very misleading and Forex is not the ‘cash machine’ most internet marketers promote it to be.People are desperate to turn their financial situation around, and they believe Forex trading is their ‘golden ticket’. Forex paints this picture of clearing all debt and extended holidays on a topical island somewhere sipping on cocktails with no worries left in the world. Unfortunately this is pretty much a fairy tale and most traders are frustrated with the unlimited money making potential of the market against their own trading performance.It’s all about how you look at your position as a trader, because most are too focused on generating fast money. You’re job as a trader is to be an excellent risk manager not to make money. A trader should be thinking in probabilities, not cash. As a trader you should always be looking for situations where the probabilities are in your favor, and being able to identify these low risk/high reward opportunities is called having an ‘edge’ in the markets.There are a finite amount of traders that participate in the market each day, and they are doing the same things over and over again to make money. This creates re-occurring patterns over and over again that you can use to identify when the probabilities are on your side.By capitalizing on these trading opportunities you’re managing your risk well, and the money naturally flows in as a result.You’re flogging your accountOne of the biggest problems in this industry is overtrading. This is usually a result of a trader believe the more effort, or ‘work’, they put into the market, the more returns they will generate. In the workforce, the more hours you put into your job, the bigger the pay check will be.Unfortunately the market doesn’t work like the everyday workforce, overtrading is very dangerous. Most new traders are lured in by high frequency trading systems like scalping and day trading. These systems demand a high level of interaction with the market, which eventually burns out the trader.How many hours can you sit there staring a price ticking away waiting for a trading opportunity? Most traders will eventually get bored or frustrated with the extensive hours in front of the trading screen and start ‘forcing trades’.By opening multiple positions across multiple pairs, you’re exposing yourself to more and more levels of risk. Remember how we said to think worst case scenario. What would happen if all these trades were stopped out? Opening multiple positions might also push through you’re risk tolerance level, and then you’re going to start getting emotional.There is no need to sit there to the point of mental fatigue, there are end of day trading strategies that only require 15 minutes per day of your time and require very little interaction with the market.You can ‘set and forget’ your trades so once you open a positions, it will either be stopped out or liquidated in profit. This hands free approach will allow you to trade in a full time professional manner and keep your day job at the same time.It’s best to be less involved with the market as possible. Remember less yields more in trading, it’s a much more relaxing, stress free way to trade.
Most traders have some currency pairs that they like to trade. Perhaps it is because a certain pair gave them their first winning trade or because of where they once vacationed. But to answer this question, you should be checking out the report available on your FX Trading Station II platform. This is where you can find all of the trades you have made since you opened your account. I realize that for some this will cause some pain, but you should analyze yourself as a trader as often as you analyze the markets. After you open up your report and see all of your trades, start checking out how your trades in the majors performed. This is the pairs that include the USD. Then check the other exotics, which are the other pairs that do not include the USD. Check your winning percentage and how much you made versus how much you lost. Do the majors offer you acceptable results? When you trade against the carry, how were your results? How about the other exotics? I have found that my best trades are in the direction of the carry. So guess what? I try to trade in the direction of the carry with each trade. At some point in the future, the interest rate environment may change which will cause a change in preferred pairs for me. However, for now these are the trades I will take as they have proven to be profitable for me. They are indeed my favorites for that reason alone.
What sometimes amazes me about trading is a belief that we must approach the market in a specific way to bring about success. When I hear people say “you must be like this” or “you should approach the market like that” I have to chuckle to myself. True, there are some core skills which are beneficial to any trader, but the way in which our brains work vary in perhaps one important way and failing to recognize this in yourself is like well, forcing a left hander to bat right handed. I guess it’s really boils down to the old adage: “find a method which suits your personality”.The human brain (on which I am not an expert) generally speaking has two major aspects to it. The left and the right side of the brain have different functions and the balance in different individuals can vary. The left side of the brain we are told is responsible for logical, analytical and the more practical sides to personality. The right side of the brain takes account of a person’s emotions, intuition and creativity.As they pertain to trading, I believe the different balances are mostly obvious in their benefits. Strong left brain advantages are very much about logical planning and discipline. Mechanical trading is a possible strength. Right brain dominance is about intuition and creativity. Seeing the market as a combination of forces and becoming synchronized with it is potentially such a powerful tool for a trader if they can harness it. A combination of both the left brain practical and logical nature with right brain intuition and creativity would surely be a force in trading the markets.But whilst there are benefits to each, there are also negative aspects to contend with. Traders who are predominantly left-brained are prone to being very rigid in their approach. Also they must think a great deal through, when sometimes the speed of the market requires seemingly Jedi-like skills. A right-brained trader might struggle with consistency of execution despite having a good idea of where the market is headed. As I always like to point out, it’s not the knowing of where the market is headed that makes money, but the effective management of a position while it’s on its way that brings success. So a mix of the two should bring about the greatest chance of success right? Yes and no. The problem with a more balanced type trader is often that they get conflicting messages. There is a need to be methodical, yet when they trade there is often the urge to satisfy their gut instincts about the markets. Acting in a purely methodical fashion only leads to the feeling of ‘missing out’ on the biggest moves and taking cues from the right side of the brain can lead to breaking of rules and discipline which ends in losses when trades don’t play out quite like they were expected to.To ‘bat’ in our natural way, we must first recognize where our left brain/right brain balance lies. We absolutely must endeavor to incorporate our greatest assets into the way we trade and work on the areas where we are weakest. However, gut instinct and intuition are formed from practical experience and underlying competence in a method. Without this, it’s often true that the feeling of what may happen is no better than tossing a coin or in many cases worse. But if you’re both logical and intuitive in nature, you must approach the market in a way which allows you not only to capitalize on your practical skills, but also gives you the freedom to trade with your instinct and enter “the zone”. The market can be a raging torrent of activity at times and so you must either be mechanical in trading it or mechanically approach how you trade your intuitions. There is no room for uncertainty or indecision at these times.I feel that so long as a trader has strong self-awareness, any type can experience great success. However, to trade truly with a left and right brain in harmony is something which I believe can potentially elevate a trader to the highest level of performance.Albert Einstein once said:-“If I were not a physicist, I would probably be a musician. I often think in music. I live my daydreams in music. I see my life in terms of music.”I believe that he would have made a wonderful trader, don’t you?Trade well.