The forex market is impossible to predict and very difficult to trade without experience. Many people are lured into this market with promises of big profits and a great life, but in reality, if they ever start profiting, many traders lose their entire account before they start profiting. These traders are not bad, they just make a fatal mistake that eliminates the accounts of many beginners in the forex market.
A deadly mistake is undercapitalization. Forex brokers allow traders to open accounts with as little as $25 and use this to attract them. However, being undercapitalized means that you make very small amounts on each trade or are at the mercy of leverage and exchange rate movements, a very uncomfortable situation.
Leverage is another account killer, perhaps the second biggest. In the forex market, you can open trades larger than your current balance. This action is known as using your funds. However, excessive leverage kills accounts very quickly. With leverage of 100:1, meaning your trade is 100 times larger than your equity, a 1% move against you will wipe out your entire account. Experienced traders use a small leverage, say 3:1, which gives them more “breathing room” if a position goes against them. Don’t be lured in by brokers offering 500:1 leverage, you will lose your account faster than you can place an order.
Spreads and commissions are absolute killers when it comes to deleting accounts. The spread is the difference between the buy price and the sell price of a currency at a given point in time. If the spread is low, around 2 – 3 pips (even 5 pips is still decent), it doesn’t matter as this is the norm for most brokers. However, the combination of a high spread with high leverage means that you will lose a high percentage of your trade even before the exchange rate moves.
The number one reason new traders fail is not having a plan. Forex trading is a business and as such should have a clear, unambiguous plan. Random trading can ruin an account very quickly, but many traders believe that they can outsmart the market and trade on their own with no experience. The best way to start your trading career is to get yourself an automated trading system, understand what it does, and go from there. This way you’ll gain experience and earn money along the way by skipping all the fatal bugs.
leverage trading
