Risking more than 2% per trade
“Go hard or go home”. This phrase is being passed around everywhere today. Sounds apt in the gym, but not so much in trading. Many novice traders are guilty of risking a significant amount of their account in any one trade. Trading is a game of probability and randomness for the most part. Even if you have a perfect trade setup, the market doesn’t guarantee a winning trade! As a trader, you can only control how your risk exposure on the identified trading setup. A good trader knows that sticking to the trade plan consistently is what makes the system profitable. It is not surprising to see some top traders only risking 1% per trade. Don’t aim to be rich in a few trades. You have to let the law of large numbers (multiple trades) work in your favor.
Moving stop losses
Another common mistake most of us make is to shift our stops further away when it is about to get hit because we cannot accept the reality of a loss. As Success coach Tony Robbins (2012) aptly put it: “People will do more to avoid pain than they will do to gain pleasure”. Moving your stops to allow the trade more breathing space sounds logical at first, but in fact you are just allowing the market to take more from you when you’ve been proven wrong. Stop loss is a price with which you exit a trade when your trading setup is no longer valid. Once price reaches that level, accept that you are wrong. Remember, the market doesn’t owe us an explanation when it chooses to go the opposite way of what we had expected, thus, just take the trade when it comes and MANAGE YOUR RISK.
Revenge and/or over-trading
Revenge and over-trading are symptoms of addiction. Gamblers do exactly the same thing when they are on a losing streak. Of course, the outcome of such behaviors are usually undesirable. Trading can be very exciting for the novice trader, but one should not derive excitement and pleasure from trading. Good trading is meant to be boring and systematic for the most part. Keep your emotions at bay if you want to improve your trading results. Do not attempt to take a revenge trade against EUR/USD just because you lost twice on that currency pair. Move on and wait for the next best opportunity that your system brings to your attention. Otherwise, do nothing. The ability to sit on your hands are just as important as clicking buttons to execute trades.
So these are the 3 ways you can blow a FOREX account. Not committing these 3 mistake could reduce the risk of ruining your account significantly. Of course, you’ll need a good system has a positive expectancy in the long-run to complement your risk management strategies. We wish you the best in your trading this year!
Tony Robbins (2012). “Awaken The Giant Within”, p.418, Simon and Schuster
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Till next week, have a good weekend!