The biggest mistake new Forex traders make

This is quite a long overdue post but today I want to address one of the biggest and most common trading mistakes newbies and experienced traders alike can make: Trading with too large volume. I’m going to break this down into four main parts;

Why do traders trade with large volume?
Why is this a dumb thing to do?
How much is too much?
What do you do if you just did everything I said not to do?

Why do traders trade with large volume?

For any trader, but especially beginners, there are a multitude of reasons as to why you’d trade a position size that’s too big for your capital. The first and probably most common reason is “I want to make a lot of money, fast!”. I’d hazard a guess at saying that the next most common reason is “I just lost a fair chunk of my trading account, now I need to make it back!”. It sounds obvious reading it here, but it’s not such an easy concept to ignore, once you start losing money and patience, the spiral can keep accelerating and you keep moving in the wrong direction.

Why is this a dumb thing to do?

Those who trade the Forex market understand that it’s one of the riskiest markets to trade. You can have a bit of a luck and win say 3 or 4 high-volume trades, but then on that fateful fifth attempt, POW, you’ve given back all your profit and then some. Trading high volume does nothing more than amplify your risk, and that quite simply isn’t trading, that’s gambling against the pros.

The first mistake in trading an inflated position size is that it increases the emotions associated with that trade. It’s pretty common to hear the pros say ‘leave you emotions out of a trade’, but that can be near-impossible once a 30% losing trade means you’ve lost 30% of your trading capital. When emotions creep in, so do irrational mistakes and illogical decision making. If you’re trading too large a size, then you’re emotions are going to run you down, and you’ll be unable to adhere to your trading plan… if you even had one to begin with. Remember we’re traders, not gamblers.

How much is too much?

In terms of trade size, there a couple of simple truths: All in is a huge mistake! 50% in is a huge mistake! 20% in is a huge mistake! 10% in is a huge mistake! Do you get the picture?

If you’re a beginner, or are struggling with position size and you don’t know what to do, just follow this one piece of simple advice – Trade small. I mean, stupid small. So small that you’re not earning anything significant even if you reach your profit target.

But why? That’s not very fun… Well, it’s not supposed to be a game, Forex trading is a business! If you’re going to trade small, in the beginning, sure profits will be small… but so will your losses. If you lose only a little amount, you’ll have very little emotional capital lost too. Without the flood of emotions clouding judgement, you’ll be able to analyse your trades, gain valuable experience, make logical moves (and mistakes), but be able to learn from it all. Then, just rinse and repeat a few hundred times and you’ll be able to execute your trading plan flawlessly allowing the natural compounding effect of small profits, increasing your capital as you do.

What do you do if you just did everything I said not to do?

Ok, you’ve made the mistake of trading too large a position size and you now need to get all that lost money back to where you started. So, now you want to resume trading low-risk trades with a bit higher than normal volume than what I’ve talked about because you don’t have the time to wait until you make your money back.

Wrong! This is the same mistake that led to losing more of your trading capital in the first place. Learn some patience and remember that if you plan to get the money you lost back by doing the same thing that caused you to lose in the first place, you’re like a dog chasing its tail.

Think about your financial goal a few years from now, when you’ll have become a trader with more knowledge and experience, who’s seen both bull and bear markets and knows how to reach a target. If you’re going to respect your capital by giving yourself the time, patience and experience to be consistent, you’ll make your money back, surpass it, and compound profits.

Wrapping up

Trading with too-high volumes will make you fear your trades. They seem vulnerable to interference. Add to that the pressure you’re under when you try to make back what’s lost, entering another high volume trade and again close it at a loss. Losses compound just like profits do.

Instead, make a conscious effort to trade so small that you don’t really care if it ends up as a loss. There’s absolutely no shame in starting small. Don’t put pressure on yourself to make a lot of fast money on something that you really don’t properly understand. Take the time to learn with small trades, and no fear of losing these small trades. The impact will also be small, but you’ll be able to think clearly and follow your strategy with consistency. There will ALWAYS be trading opportunities, so why hurry?

 

Source: Vantage FX Blog