The no.1 Biggest Mistake I See Forex Traders Make
In this video:
00:34 – Most traders take too big a position size
01:00 – Forget about making pips
02:40 – Understanding the current market conditions
03:26 – Reduce the risk you take per trade – use my calculator
05:40 – Trader risks it all on one trade
I'd like to discuss the number one biggest mistake that I see Forex traders making. It's a really important point, let's get into it right now.
Hello Forex traders. Andrew Mitchem here, The Forex Trading Coach, and this is video and podcast number 221. I want to talk about the number one biggest mistake that I see Forex traders all over making, and it's as simple as this.
Most traders take too big a position size
People trade with too big a position size. Their lot size is ridiculous in most cases and it causes too many problems. As a trader, these are the facts. You need to trade with low risk per trade, you need to have controlled risk per trade. You need to know what the very worst outcome is on that particular trade, and also, when you think about that.
Forget about making pips
You really need to forget about making pips. I've got a saying that “Pips make you poor”, and what I mean by that is that the actual thought process, like the mental approach of trying to make X number of pips is ridiculous. It is not a way that you're going to end up being a good trader. What you need to do is have low risk per trade and controlled risk per trade, so you know the worst you can do on that trade, but to calculate that, yes you need to know the stop loss of the trade, but you need to make that stop loss equate to certain percentage of your account. You see, I see people out there all the time, not really having a clue what they're doing and they're placing say one standard lot on a trade.
Why would you place one standard lot? What does it mean? It's different for every trade, isn't it? Some people might say, “Oh, now I'm going to place two standard lots, or 0.5 lots.” Whatever it might be, but they put the same one every single trade, and it has no relevance to what currency pair they're trading, because don't forget, different currency pairs have different amounts they pay out per pip of movement. It has no relevance to the timeframe of chart they're trading, and generally, the shorter the time frame chart you trade in general, the smaller the stop loss will be but quite likely the smaller the profit target will be in pips. If you're just out there chasing pips, it really is almost doomed from the start. There's a number of issues that people have there, so they're placing too big of a position size without really knowing what they're doing.
Understanding the current market conditions
The problem is, also people don't really understand the market conditions at the time. “I place a 50 pip trade,” that's what you hear from a lot of people, 50 pip stop loss per trade. “Aren't I good? I'm using a stop loss.” Well, what does 50 pips mean? 50 pips on a British Pound/New Zealand Dollar is very, very different to 50 pips on a Euro/British Pound. 50 pips on a daily chart is very different to 50 pips on a five minute chart, so you need to get into context of what it is you're doing and what timeframe you're trading, what the conditions are in the market right now, what currency pair. All these sort of things need to be taken into account.
Reduce the risk you take per trade – use my calculator
What you can do in order to help yourself is to reduce your risk that you take per trade down to something that's small, low, conserved, manageable, and eliminate a lot of the emotions involved in trading. I've got something that's definitely going to help you. I have a lot size calculator freely available on my site. It's been on my site for years and years, actually. It's got tens of thousands, I think probably into the hundreds of thousands of downloads by now, from traders all around the world. It's been on my website for probably I don't know, eight, maybe more years or so. It's just an invaluable tool. It works on the MT4, MetaTrader 4 platform. It's freely available.
What I'll do is I'll put a link to that calculator below underneath this video. It won't cost you anything, freely available. It's my gift to you to help you out, and what it means is all you do is you drag it on as a script onto your MT4 chart. It knows what your account size is because it calculates your account size, it knows what your currency denomination is, and it also knows what currency pair you're trading because you're dragging it onto the trade and the pair that you're about to trade. All you need to do is enter the risk that you want to take on that trade. It's defaulted as nought point half … Sorry, 0.5 of 1%, half of 1%.
You can change it if you wish to, and all you need to do is enter the stop loss of that particular trade in pips, press “Okay” and it will tell you you need to put in X number of lots and if you put in that number of lots on your trade, and you have the stop less at the level that you said you're going to have it at, that means that the very worst you can do if you get stopped dead on that trade is lose half of 1%, if that's the risk that you calculate on the calculator. It's a brilliant tool. It's so, so useful and what it does is it changes your mind. It changes your thinking, it changes your whole thought process, mentality around trading, gets you thinking more like a professional trader, gets you worried less about trying to make so many pips. It's a great tool.
It really will help you because that is really the biggest mistake that I see most traders taking, just risking crazy amounts.
Trader risks it all on one trade
In fact, I had a phone call just yesterday from a guy who said that … It's slightly off subject because this was more binary options. They told him to put his entire account risked on one trade over the Brexit several months ago, and of course it lost. Crazy, crazy things that some people are doing out there. Now, I know that was binary options and in my opinion, you should stay well clear of them, but even as Forex traders, so many people just risk crazy amounts per trade without really knowing what they're doing.
Control your risk. It'll help you long-term in the end by an absolute country mile. It'll make your trading better, it'll make it more enjoyable, it'll make your longevity as a trader better, and you'll end up doing so much better longer term.
I hope that helps you. Once again, this is Andrew Mitchem, the Owner and Trader at The Forex Trading Coach. Have a great weekend. I'll see you this time next week for video number 222. See you then, bye.