There are numerous myths surrounding money management commonly believed by forex traders. However, the reality is quite surprising. Almost every forex trader recognizes the importance of money management in achieving profitable trading results. Money management becomes a crucial key that must be applied in every trading position to avoid rapid losses and increase profit potential. However, behind the importance of money management, there are several myths that traders should not fully believe.
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Myth 1: Setting Risk Focus on Pips
One common myth is to determine risk and profit targets in pip units rather than in a specific monetary value (e.g., USD). Some traders believe that by avoiding the involvement of monetary value in profit and loss calculations, they can control their emotions. However, professional traders calculate risk and profit targets directly in monetary value. They realize that the primary goal of forex trading is to obtain real profit in monetary value, so risk and reward should also be set in monetary terms. This approach also considers the psychological aspects for traders and treats forex trading as a business that involves real money consequences.
Myth 2: Risking 1% or 2% of Capital is Sufficiently Good
A popular money management strategy is to risk a certain percentage of the capital. However, this is relative and should be adjusted according to each trader's account size. Determining a flexible and effective risk size does not always have to be in the form of a percentage of the capital.
Myth 3: Setting Large Stop Losses Will Increase Risk
Many traders believe that setting large stop losses will increase risk. However, understanding the concept of position sizing, this is not true. Position sizing is a way to determine the size of trading lots adjusted to the desired stop loss size. Proper implementation of position sizing will ensure that risk remains controlled, even with large stop losses.
Myth 4: Risk/Reward Ratio is Not Important
Beginner traders often overlook the calculation of risk/reward ratio, although this is very important. Professional traders always focus on the risk/reward ratio for each trading position with realistic profit targets. They realize that forex trading is a game of probabilities and manage capital wisely.
Example of Money Management
In the example of money management comparison between trader A and B, it can be seen that proper money management implementation can produce better trading results, even in the same drawdown situation. Traders should scrutinize money management myths and find approaches that suit their own situations and needs.
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From the above discussion, it can be concluded that correct money management does not always align with traders' common habits. Traders need to understand the evolving myths and adjust their money management strategies to achieve consistent and profitable trading results.
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