Forex Mistake #17 – Fast Money, Fast Cars

Why Trying to Make Fast Money Trading Forex Could get you Broke?

A fast car is cool, I’ll give you that. Fast money is cool too, but both of them come with huge risks and that’s something I’ve learned on my own. The car I drive is not something out of the ordinary when it comes to speed, but if it were, I would still drive it responsibly… well; there was a time when I didn’t do the same with my Forex account. I needed my money fast. Dangerously fast.

 

Better Late than Never – How?

If you’ve read some of my other articles in the “Trader’s Mistakes” series, you probably know I started as a complete newbie. Yes, everybody starts that way, but I wasn’t even aware of the fact that I don’t know anything about the market and I jumped in head first. The result was a terrible headache generated by the impact with the cold reality and, of course, a zero balance on my trading account. Then I stopped trading for a while, learned the business and came back with a vengeance. I learned about the technical side, fundamentals and money management… yea, I was ready. Or so I thought. The thing is that I wanted to take revenge on the market and to recuperate all my losses in the shortest time possible. To do this, I was trading with a lot more leverage than I should have and as a result my account was overexposed. The widely accepted “safe” risk is about 2% – 3% of your account (some go as high as 5%), meaning that you set up your position size in such a way that you cannot lose more than 2% of your account on any given trade. But that wasn’t enough for me because it would mean I have to wait too long until I get rich so I decided to consider rubbish all risk management rules. I started to trade big positions, way above the 2% or even 5% mark. Sometimes I went as high as 25% risk on one trade, meaning roughly that I could wipe out my entire account in 4 losing trades. The reason why I traded big and risked so much was of course my eagerness to make a lot of money in a short time, because by increasing the position size I was increasing the potential profits as well. And that was the only thing I was thinking about: how much money I could make, not how much I could lose. Bad call! To be honest I still trade a lot more than 5%, sometimes even up to 25%, but I have a different approach now: I call it box-trading. I don’t know if somebody else uses this name or this type of money management but here it is: I imagine my entire account is a big box and I divide that into smaller boxes. Assuming I have a 1,000 USD account, I mentally divide it into 10 accounts, 100 USD each and I start trading one of those accounts. Even if I trade with 25% risk on a single trade, that’s still just a 2.5% risk on my entire account. My broker actually offers me the opportunity to have my money in a “Vault” (sort of like a wallet on their website) and to transfer any amount from that Vault to my Meta Trader platform. This way I can limit my risk but it also keeps my “high percentage trading” need fulfilled. Oh yea, and one more thing: in case some Central Bank decides to do something weird, shocking, outrageous, horrible, scandalous (hint: Swiss National Bank), the majority of my funds are protected.

 

Fast money also meant news trading. I couldn’t watch price drop like an axe in a lake without doing anything. Same when it was skyrocketing. I had to go in and I was constantly thinking that I will miss an opportunity, price will go 200 pips in one direction and I will be the only fool in the world who didn’t make any money on the move. But during news releases, spreads are wide, price action is irregular and often times my Stop Loss would be hit in less than a minute, before returning to go in the original direction. So I thought to myself: “What’s worse than being the only fool in the world who didn’t make money on such moves?” And I had a good answer for that: “Being the only fool in the world who lost money while everybody else made money”. That was the end of my news trading days. I realized I cannot anticipate what Draghi or Yellen will say or how the market will react and I also understood that it’s better late than never when it comes to making money.

 

The Lesson Learned?

Once I’ve stopped thinking about getting rich quick, I was able to make much better trading decisions. I stopped feeling like I was in a race or like I needed the money yesterday and I understood the market will be here tomorrow too. After all, protecting your account is paramount because if you don’t have one, how are you going to get rich? As for time, I spent more time going nowhere with my trading – winning and soon giving it all back – than if I would have adopted a more conservative approach right from the start.

 

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