Based on experience, forex money management proves to be a very important aspect of foreign exchange trading. But the sad fact is that there are many myths and legends propagated to a greater majority of beginning forex traders that are just so wrong, you will not be wondering why not too many of the trading newcomers are able to survive their first few months. Indeed, the trading atmosphere is never kind but making new traders believe in wrong concepts and principles will only bring their doomsday earlier for them.
The following are some of the commonly propagated forex money management myths that you should know. The next time, you receive such an advice, think twice before believing. Based on experience, the biggest claim that has no water:
- “Due focus should be given by forex traders on pips,” is a myth. Many “experts” give this kind of advice in the World Wide Web and elsewhere. They say that focusing on the lost or gained pips is much more convenient and practical than keeping track of how much money you have raked or lost in the trading process. Here’s the justification of the propagators of the myth: By erasing the idea that it is money that you are dealing with, the emotional attachment to it will somewhat be erased and you can “play” the game in a more level-headed way. If you think that this sound absurd, it is.
Being a trader and choosing to be a trader means that you have to be used to talking about money, gaining money, and losing money. Comparing the entire process to a game might even worsen the scenario. If you think that you’re dealing with points instead of dollars, then you might not take it that seriously. Honestly, this myth is one of the most shameful among the popularized forex money management myths.
Here are other myths that aren’t true:
- “Keeping the risk level at 1 or 2 percent is a slow but sure way of growing your money in your account,” is not really true. This may be true for beginners, or traders who are just beginning to learn the ins and outs of the foreign exchange trading. The bad thing is that is there are many traders who think that they should do this for ever. The inefficiency of this tip is further tested by the fact that most traders keep an account that contains at most $5,000. What’s the point of consistently risking just $50 or $100? If you want to be a serious trader someday, do you think this sounds serious enough?
- The notion, “wider stop gambles a larger amount of money than stops that are smaller,” is a big fat lie. If you are one of those who believed in this “principle” this is the best time to correct our notion. Widening the stop loss will not automatically increase the amount being risked. In the same manner, you should not believe that if you decrease of the stop, you are decreasing the risk. Perhaps you have just misunderstood the concept of position sizing.
In the end, the most important forex money management is brushing up on the most important concepts and applying them properly. This will greatly decrease the risk of losing large amounts. Finally, do not blame the stops if you lose that much. After all, it’s all in your hands.