[I][/I] [I]So you got a great setup going. You are banking pips each and every day. You decide to drop more money into your account, you increase frequency and … you lever up! Because it’s time to stop being a wussy! It’s time to make it rain!
I give you two, three days – a week at most – before your fantasies of “bricks on bricks on bricks” blow a hole through your account big enough to drive a double-wide through. You just made the worst mistake in trading – you forgot about the Hidden Risk Relationship.
In any financial transaction you can achieve leverage two ways. The more common way that most of us are familiar with, is to simply borrow against collateral. That’s what margin is and we are all aware of its dangers. At BK we have a saying 4X for forex. It’s a shorthand for the maximum amount of leverage you should employ on any trade. It may seem ridiculously conservative to most traders, but if you want to stay alive in this game for more than a month then using 4 times your account size is about all you should do.
But if you are day trading. And I mean really daytrading where you do 5 to 10 trades every single day then 4X for Forex is way to aggressive.
But let me explain to you why. It has to do with the 2nd way to achieve leverage which is through turnover. If you ever worked retail you are well familiar with both concepts. You could borrow lots of money and stock the store with many items. Or you can flip over your inventory three times per month like Zara and achieve amazing leverage on your capital.
So when you are daytrading 10 times a day you are effectively flipping over your inventory. A lot. Which actually means you should use LESS leverage rather than more. Let’s say you use our 4X for Forex formula and you trade 10 times per day. That’s effectively 40x lever factor as you flip over 4X your equity 10 times per day. Do you think there is a chance that in doing 5-15 trades per day you could lose 3 or even 4 times on some days? You bet. At even a 25 basis point stop you are now down 4% in just one day. Do that a couple of days in a week and suddenly you are down 10% without even trying.
There is another reason why high leverage and high frequency do not mix. Revenge trading. No matter how much you promise yourself you won’t do it. You will. You’ll hit a couple of bad trades in a row. You’ll get pissed, and you’ll want to “get it all back” in one fell swoop. But if you are already trading on leverage that means you will have to lever up 10x, 20x to make up that one trade that brings you back to even. That is prescription for disaster. On the other hand, if you are trading at no leverage, even a few revenge trades won’t hurt you too badly. Certainly they won’t damage you permanently.
So the Hidden Risk Relationship comes down to frequency versus leverage. The more you do of one, the less you do the other. There is good reason why HFT funds trade only a couple of hundred shares per position. They understand that that returns are a function of frequency not leverage. It’s time that retail traders learned that lesson as well.[/I]
I don’t always agree with what Boris Schlossberg writes, but he certainly has that one right. And it [I]is[/I] time that retail traders learned that lesson, as well: it’s fully relevant to us.
In my view worst mistake is to take high risk with less amount you are having in your trading account. And to be hurry in trading . Not be quick in trading think 100 times before trading because your every step is important that will determine at what side you will go.
For me the worst mistake is greedy and trade blindly, but if we trade using risk management hence these loss still on our management and not facing big loss in single plan, and if only trading with recklessly also blindly, often in my trades getting fail
LOL, but hey these will always remain a matter of opinion, we all have our own sets of mistakes, even after trading this hotforex account of mine for almost 6 years i still make some silly mistakes, but i can safely say i learnt to avoid bad habits well a good number of them atleast but still we continue to strive
Trade against the trend… still do it from time to time… snatch defeat from the jaws of a victory…
Go too big to quick… trade the smallest positions possible to get your strategy sorted… size does matter…
Move your stop loss… still do it from time to time… turn a small loss into an even bigger loss…
Chase a loss (my favourite) by adding to the position hoping it will turn… you got it wrong, kill it and move on…
Fiddle with trade in progress… let the market do it’s thing… less stress involved when your not watching…
Set a trade with a tight SL and even tighter TP… Limit your profit… Set a trade with a SL and no TP and take profit manually… I find a couple of extra pips on some trades with this easy technique…
Some of my most lucrative trades were $0.50 positions that I set a SL and walked away and let run…
Just a few of my regulars… I have committed every offence in the play book…
Opening a trade with a larger percentage of your account than you can afford. That mistake could lead to other mistakes which turn into an avalanche, so to speak.
Yes lot size is a problem for many newbie traders. They over trade, use over size lot size in their trades which is one of the biggest mistake in trading.
Over trading is big matter in forex trading, many beginner might they too much excited and become over trading, with add new position with hope increasing fast profit, this might another name of greedy which also as one reason trader too quick getting loss
Getting included in day trading is the worst mistake. Try not to do this unless you are an exceptionally taught apt merchant. For most brokers day trading may give little, short-term gains but in the long run, it will cost you to miss major moves where the real money is made.
In my experience still not easy to making consistent profit, using scalping also need more concentration and I don’t like with this strategy because not always I can’t focus on the chart while missing opportunity sometime also causing fail and making emotion, and I like medium term as intraday or sometime swing trade
You have no idea how much I agree with you :(. I have that bad habit always to believe that there is still a chance that the market turns around and my floating loss turns into profit. Well most commonly it doesn’t so risk management is indeed crucial.
Hello brickiv,
Even you follow a good strategy you have to find the one that best suits to you. Of course, you cannot earn every trade that you place but you have to earn more than you lose.
Not taking proper management rules with trading is one of big mistake. Like many traders take big lot size which their account can not manage with investment and risk. SO result in loss.
