Sean Hyman
Contributing Writer
instructor@mywealth.com
In the years that I’ve spent being an instructor to currency students all around the world, I’ve realized that the names and faces change but the same mistakes tend to happen.
I think it’s because its human nature to be drawn to the same errors. So let’s talk about a few of the biggest ones so we can “put out a few of these fires” and get you on the road to success in your trading.
The biggest mistake I see is that traders always say, “How little (dollar wise) can I get started with?” rather than saying how much SHOULD I start with?
Being undercapitalized is one of the biggest mistakes in any market but particularly in a higher leveraged market like currencies. In my opinion, a trader ought to have at least $2,000 to $3,000 in their account per mini lot traded minimally.
Yet there are those that try it with $300 to $500 and blow up their accounts quickly because they are risking 30% to 50% minimally on each trade. Well if just one trade doesn’t go right (and that’s likely), you’ve lost 1/3 to ½ of the account minimally. That’s simply impractical.
Pros risk 1% to 5% of their accounts and retail speculators want to risk 20% to 50% of their account balances on each trade and that just doesn’t make any sense.
The pros will likely be wrong almost as much as the retail trader but they’ve only lost 1-2% when the retail trader is down 30-50% at the same time. Well, the pro can easily recover but it almost takes a miracle for the retail trader to recover.
So start off well capitalized in your mini account.
Undercapitalized + Overleveraged = A Blown Up Account
The next most common mistake is that traders ask, “How many lots can I trade with this account balance?” and they should be asking “How many lots SHOULD I be trading with this account size. You will find many traders that have the capability to trade 10 mini lots will trade 8 or 9 mini lots. One wrong move and their account is done for. They should be trading 1-3 mini lots usually if they could trade 10 theoretically.
So undercapitalization and overleveraging through trading too many lots are the two biggest mistakes.
However, the next biggest mistake lies in how they treat stops. There are two major errors here. One is that they don’t believe in trading with any stop in place. Well, if you don’t then you are saying you are willing to risk 100% of your account balance on each and every trade.And guess what? If you do that long enough, there will be one trade eventually that will take out 100% of your account. So avoid that one and you will be glad you did.
However, the other mistake is placing stops too close for the pair they are trading. A handy tool here comes into play, I say.
Let the ATR be your secret weapon when it comes to placing stops.
I’d suggest using the ATR (average true range) technical indicator on your chart before you place a trade. It will clue you in to how volatile a pair is before you put on the trade.
You see, there are some pairs that trade 150 pips a day and others that trade 300 to 500 pips a day. Well, if you put the same stop distance on every pair, it’s not the same. A 30 pip stop on a pair that moves 300-500 pips is very likely to get taken out. However, if it were a 30 pip stop on a pair that trades 100 pips a day, then that might be more practical.
Place the ATR on your daily, 1 year chart and see what the reading is. For instance, right now, you will find that the EUR/USD trades about 237 pips each day. However, GBP/JPY trades about 451 pips a day…huge difference huh? You’d better trade ½ as many lots of GBP/JPY as you trade of EUR/USD and your stops need to be twice as wide on GBP/JPY too since its much more volatile. Be sure to place your stops at least 1 to 2 ATRs away.
So gauge the volatility. Also, don’t get so fearful of losing money and therefore put stops too close. I’ve seen people use 5 and 10 pip stops. I’m not a betting man, but I’d bet on your stop getting taken out every time and I’d be right probably 95 out of 100 times. So those are pretty good odds to me.
Therefore on any pair, down size the number of lots you are trading and increase the stop distance. You will be likely risking the same overall dollar amount as if you had more lots and tighter stops but the stop that is further away is statistically less likely to get taken out than the one closer to the price action.
All of these mistakes have one thing in common; they put the odds against you. If you are undercapitalized, you’re almost doomed to fail. If you trade too large for whatever account balance you have, the same is true. If you use no stops or your stops are too close, then you’re in the same boat again.
You see, you’d be surprised how much money you can make over a year when you trade what feels really conservative. Increase your account balance, dial down your lot size, widen out your stop distance and you will find that you start to do much better than before even with the same signals and strategies being followed. Because in doing this, you’ve just skewed the odds more in your favor.
By placing the stops wider, they are les likely to get taken out. When they are taken out, the better capitalized account is losing less percentage wise than before. And since you are trading less in number of lots, the loss isn’t as magnified as before. See how that helps? Trust me, it helps a ton. This is how the pros think and operate. It’s the biggest difference between a pro and a typical retail trader – risk management.
Remember, that if you are getting margin calls, it is telling you that you are not doing something right. A true pro that is trading by his rules never gets a margin call because their risk is about 1-2% of their account equity and that’s no where near a margin call on the account.
Learn to think like this and you will find that you will succeed.
Small nibbles add up over just a few months!
Just to prove this point to a buddy of mine, I opened up a micro account (which is 1/10th the size of 1 mini lot). I traded 1-3 micro lots (1/10th to 1/3rd of 1 mini lot) for some months. My stops were 200 pips wide typically. Within 4 months, I was up over 100% in the account. So don’t tell me you can’t make any progress by trading small. That’s simply not true. Now my buddy is a believer too.
Don’t try to get rich overnight. Don’t go for 300% returns in a month. Be practical and patient. Remember, if you can make it really fast, then you are levered enough to lose it very fast as well.
So be good to your emotions and protect what I call your “emotional capital” just as much as you protect your actual capital and I think you find that you trade better and make better judgments plus you have a better statistical edge for success due to how you’ve positioned your account balance, lot size and stop distance.
Many times, it’s not your strategy that’s messed up…it’s the risk management that is. The numbers just don’t skew in your direction. Well, now you know how to change that. So go out and conquer the world little by little each day and you will be surprised at what your account balance looks like just one year from now.
