A Forex Trader's Biggest Enemy
Toby gives an account of a powerful factor behind currency trading that if used wisely is worthwhile, but if misused, can cause people to lose their trading accounts: leverage. Here's the article:
The biggest enemy to most forex traders is not the market or their trading system but the use of leverage. When using too much of it, most of times it will take your account serious down, even with one single trade.
Last week, a new forex trader showed us his account statement and asked what he was doing wrong.
After taking a look into his account statement, we did notice the following:
Start balance: $25000
How did he manage his account down so fast?
First do the math.
His first trade went completely wrong and was closed for a 130 pip loss which equals -$19500. In fact this trader was getting a margin call from the broker to prevent him from further losses. A margin call will occur in this case when traderís balance is falling below $7500 in equity.
As a result of this trade, only $7500 was left in his account.
Next couple of trades where traded also on max. leverage which could be used, only to win couple of pips and losing a lot of pips.
The result was an account balance worth $2.3K after 2 weeks trading FX.
When trading at big leverage, only couple of pips (winning or losing) can affect your account dramatically. Regarding our trader, only 10 winning or losing pips traded at 15 standard lots equals $1500 which is 6% of his start balance.
Trading at high leverages, a trader will close the trade if he win couple of pips because of the big positive %gain on his account balance.
Going into the negative, trader will hold on the trade and hoping it will come back, most of times, this will result in a very big loss.
How to avoid this:
As a general rule, only take 1 mini lot for every $1000 in account. For a standard account, only take 1 standard lot for every $10K in account.
Please note: Most fund managers are not even allowed to trade at these leverages, for example, some of them only take 1 standard lot for every 50K in account.
Toby Smitz - Daily Operations Forex Resources.
Article Source: http://EzineArticles.com/?expert=Toby_Smitz
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