4 Money Management Mistakes to Avoid at All Costs

Money Management is one of the main disciplines of Forex Trading, as with any other investment activity. It allows you to protect your capital, a necessity that is highly felt by traders, who have to deal every day with a market that is rich in opportunities but also full of pitfalls, often unpredictable and ungovernable. Specifically, Money Management consists of various techniques that allow you to keep losses under control, to trade knowing - for each order - the maximum possible loss, and optimizing your activity accordingly. Money Management is of vital importance, but not at all easy. Of course, at a basic level, it is truly within everyone's reach. When you get into the specifics, however, and set yourself the goal of taking full control of your capital, the matter becomes complicated. For this and other reasons, it is very easy to make mistakes that can affect your Money Management activity and, consequently, put your capital at risk. In this article, we describe the four most common mistakes.

Focusing on money

It might seem counterintuitive. After all, those who do Forex Trading (but it applies to any type of trading) do not do it as a hobby but to make money. So... It's obvious that you need to focus on money! Well, this is a correct perception from a logical point of view, but useless or even harmful from a practical point of view. Focusing on money means a few things. First and foremost, loading yourself with anxieties and fear. If you think too much about money, then the fear of losing it (legitimate) and the paralysis due to excess fear (harmful) arise. Secondly, if you always think about monetary goals, you live trading as if it were a duty, hence the anxiety about achieving the goal. So, what to do? It's simple: focus on the process that allows you to achieve the goal, and not on the goal itself. Rather, while maintaining a "numerical" control over the maximum possible losses, when it comes to performance, it is good to think in percentages. In any case, pay the utmost attention to the how and not the if. That is, on the strategy and operations, and not on the future win. As already mentioned, the maximum possible loss, that yes, must always be kept in mind. We admit it, it's not an easy logical leap to make. Also because money arouses a strong emotional drive, but considering Money Management in these terms (i.e., as a source of protection and defense) is the only way not to be influenced by the market, which can normally be summarized in a few words: fear and performance anxiety.

Undercapitalization

This is an important step, but often overlooked. The reasons are many: from the fear of losing money (always her!) to a wrong reception of advertising messages. These often carry information about the possibility of opening an account with a few hundred euros. All true, it's not misleading advertising. However, this increases the perception that not only is it possible to trade starting from a small capital, but that it is also immediately profitable. This is not the case. If you start with 200, 300, 400 euros, even in the best case scenario, your earnings will be so meager as to produce more harm than good. Just think about it: a 5% return per month is already an extraordinary result. But if you start from 200 euros, you will have earned only 10 euros for a month's work! Now, if you intend Forex Trading as a pastime, this prospect may be fine. If you intend it, even in perspective, as a tool for earning and financial freedom... Well, that's not it. The problem, let's be clear, is felt right from the start. And this is precisely where the greatest risk lies. Starting with little capital can lead to the development of terrible habits, which push the trader from the frying pan into the fire. The reference is, obviously, to financial leverage. Thanks to financial leverage, in fact, it is possible to multiply potential gains, just as if you were trading with a capital exponentially higher than the real one. A simple leverage of 1:10 is enough to transform those 10 euros into 100 euros. Too bad that, in parallel with potential gains, potential losses also increase. With the risk, truly catastrophic and terrifying, of seeing your account zeroed out in a couple of orders. Therefore, rather than earning very little or risking leveraged operations, "capitalize" yourself. Start with figures in the order of at least a few thousand euros.

Exiting the market too early

Even excess prudence can be a mistake. Maybe not a fatal mistake, since prudence can also lead to a missed gain, but it certainly does not lead to a loss. However, if it is true that the goal is, ultimately, to create an income, certainly early exit from the market can be an obstacle. In short, one must be wary of all excesses. On closer inspection, even prudence is one. But... What does it mean to exit the market too early? Very simply, it means exiting when, according to your strategy, your analyses, you exit the market when the prospects for price recovery (if the trade is at a loss) or the prospects for gain (if the trade is going well) have not yet been exhausted. It is obvious that, if Money Management has been carried out according to the rules, this attitude represents a real denial of Money Management itself. A violation of its rules.

Risking too much with a single trade

If risking too little is a mistake, risking too much is also one, of course. This happens, very simply, when the value of the maximum possible loss is set incorrectly, excessively optimistic. It can also happen when you violate the rules of your Money Management, staying in the market too long in the hope that it will recover, even if the limit of the maximum possible loss has already been exceeded. In general, this is a "derived" error, that is, a consequence of a previous error. For example, low capitalization, with subsequent application of high leverage to increase earnings prospects. Regardless of the reasons that lead to excessive exposure, this is a drift to be absolutely avoided, as it is a harbinger of disasters. Unfortunately, many novice traders learn this truth the hard way, precisely because they fall into these types of errors (at least in the beginning).