Three Misconceptions of Money Management for Forex Gold Traders

Myth 1: Traders focus too much on profit points

Perhaps, some "expert" has advised you to focus on profit and loss points rather than the profit and loss of dollars in your account funds. The principle behind this myth is that if you focus on profit points rather than dollars, you will not consider your trading account as a change in money and more like a point game, and you will become less emotional. Is this a joke? The whole purpose of trading is to make money. You need to be aware of how much money you are risking on each trade so that the actual situation can be effectively communicated.

Trading should be treated as a business because it is. If you want to be consistently profitable, you need to treat every trade as a business transaction. Any business transaction has the potential for risk and reward, just as every trade you execute. The fact that you trade in pips rather than dollars makes the trade seem less real and makes you start to take it seriously.

We have to define risk clearly as "the risk of capital or the return of capital," and just because you take a lot of pips doesn't mean you take a lot of capital risk, just like if you have a small stop loss, it doesn't mean you take a small amount of capital risk.

Myth 2: Taking 1% or 2% risk on every trade you trade is a great way to grow your account

This is one of the more common money management myths that you've probably heard about. While this sounds good in theory (a misreading of Kelly's formula), the reality is that many Forex traders have trading accounts with only $5,000 or less. So how silly to believe that taking on 50 or 100 dollars per trade will effectively and fairly quickly grow your account funds!

If you take a 2% risk of losing 5 trades in a row, and now your account is down to 4500 dollars, and you are still taking a 2% risk on each trade, you will almost have to win 6 trades in a row to get your account back to no loss or no profit. Know how difficult it is for any trader to win 6 trades in a row when actually trading.

What happens when traders use this risk model? It starts well. They take 1% or 2% risk on their first few trades, and they may all win. But once they start taking a string of failures, they realize that they have lost everything they made, and it will take a long time to get back the money they lost. So they start trading too often and break the pot, because they now realize that if they take only 1% or 2% risk on each trade according to this method, how long will it take for them to get it back?

So while this money management method allows you to take a small amount of risk per trade because it theoretically limits your emotional trading mistakes, most people simply don't have the patience to take 1% or 2% risk on their relatively small trading accounts. Ultimately, the worst thing that can happen is that you trade too frequently to your bottom line, and recovering from a loss is a difficult task.

This is the most important fact, if you start from 10000 dollars and go down to 5000 dollars, use a fixed N% risk control method. You will have to take "longer" to recover, because the trade you started with 2% risk was 200 dollars, but during the loss period, when the funds go back to 5000 dollars, you can only take 100 dollars of risk per trade. So even if you have a good winning streak, your funds are recovering at "half the rate". Therefore, I suggest that you start using a fixed $amount to calculate your position. In order to achieve the purpose of capital curve growth and control retracement, you should treat the net worth of each position squaring as the principal. If my capital increases from 10,000 dollars to 12,000 dollars, you should treat 12,000 dollars as your entire principal, rather than using the 2,000 dollars you earn to blog.

Myth 3: Large stop-loss funds take more risk than small stop-loss funds

Many traders mistakenly believe that if they place a large stop loss, they will necessarily increase risk. Likewise, many traders believe that setting a small stop loss will reduce risk. Traders adhere to this false belief and execute because they do not understand the concept of adjusting position size.

The concept of setting up a position is to adjust your stop loss position and risk based on the size of your position or the number of lots you trade. For example, if your risk is 200 dollars and 100 pips each, you can trade 2 mini lots: 2 dollars per pip x 100 pips = 200 dollars.

Suppose you want to trade now, but the upper shadow is unusually long. Even though this means that it is a 200-point stop loss, you still have to set the stop loss above the high point. As long as you adjust the position size to meet this large stop loss, adjusting it to 1 lot instead of 2 lots, you can still take the same risk of 200 dollars each time. This means that by adjusting the position size to meet the size of your stop loss, you can still take the same amount of risk. This is a more advanced method, we just need to understand the concept now.

Now let's look at an example: What would happen if you failed to effectively resize your position to reduce your lot size as the stop loss distance increased?

Example: Two traders with the same amount of risk per lot on the same trade setup. Trader A's risk is 5 lots and a 5-pip stop loss. Trader B's risk is the same 5 lots, but a 20-pip stop loss, because he believes that it is a nearly 100% certain trend and there will be no reverse 20-pip sweep stop loss. This logical error is typical. If a trade starts, the trend will not reverse you. In theory, the trend is stopped. And we all know that inforeign exchange marketNo matter how strong the trend is, it may change.

Trader A left the market with a stop loss, and his predetermined risk limit was 5 lots * 5 points * 10 dollars/point, which means a loss of 250 dollars.

Trader B also left the market with a much larger loss, because the market did not go as he had hoped, and the reversal hit his 20-point stop loss. Trader B lost 5 lots * 20 pips * $10/pip, and now his loss is 1000 dollars instead of 250 dollars.

We can see from this example why the idea of a stop loss is just a way to expand your stop loss, not a way to increase the equity of your account! In fact, it is the opposite, it is a "good way" to quickly reduce the funds in your trading account. This is the fundamental problem that plagues many traders, which is the lack of understanding of the true power of risk-reward ratios and position sizing.