I keep reading articles about the benefits of forex trading but these are actually cons for most traders and that is why 95% of traders lose all their equity quickly and here we are going to look at the two specific reasons why most forex traders lose…
1. Leverage
Today you can leverage your investment at 200 or even 400 to 1 with an online forex broker, creating huge profit potential. But the fact is that most traders actually exceed leverage and lose.
With leverage, you need to be very accurate in executing your trading signals and very careful with your stop-loss protection. If you are not careful when trading with leverage, a rapid rise in stocks will wipe out your position.
In stock trading you can buy and hold and you only risk what you paid for the stock and as long as it comes back you make a profit and you can wait.
Forex trading is different – you have open-ended losses and they accumulate quickly. You can’t just sit back – you have to act.
Lacking discipline, most traders very often hope for a position to turn and have no exit point. A small loss quickly turns into a big loss and your equity is gone. Most traders hate to admit they’re wrong – they want the big profit that leverage gives them, but don’t think about the downside.
2. Volatility
Forex prices are volatile and make big moves every day – combine this with leverage and you have a powerful tool for gains, which of course can also cause losses.
Most traders have no idea how volatility affects their trading and how to deal with it. Most forex traders have never heard of, let alone understood, “standard deviation of price”, but it is an essential part of any trader’s forex education.
You need to know what normal volatility is and isn’t in order to be successful with your forex trading strategy.
Most traders make the mistake of placing stops too close to their entry point and they get thrown out of control by normal volatility and this is because they are usually overly leveraged. Most traders try so hard to avoid risk that they actually create it for themselves.
The way to make money in forex trading is:
Use low leverage and stops outside normal volatility – NOT high leverage and stops inside normal volatility.
When trading Forex, it’s easy to see the longer-term trends on a Forex chart – making money from it is anything but that. Correctly executing trade signals in line with the odds and setting sensible stops distinguishes the winners, the big ones Accumulate profits from others.
Forex trading is a high risk/high reward – the greater the risk, the greater the reward – period. You must be aware that you must manage risk and create your own set of rules in your forex trading system to combat it.
REMEMBER
The pros of forex trading can be cons as we have seen and you need to think about wider stops with lower leverage rather than tighter stops with higher leverage. Most traders do the latter and are quickly wiped out. Don’t make the same mistake.
leverage trading for beginners
