Using Leverage Appropriately
I recently received an email from a new trader who found himself in a losing trade and didn’t know what to do. He had an account with a balance of $2000 and sold 20 (10K) lots of a currency pair where the margin requirement for each lot was $75. The market had moved against him by about 20 pips and he wanted to know if I thought the market was going to come back. Before I had a chance to answer the email, the trader received a margin call and was automatically closed out of the position.
He was a little upset about losing $500 on just one trade and thought that maybe he wasn’t cut out for trading.
He also asked that if he sent me the details of the trade, would I offer comments on what went wrong. But without any more details I already had a good idea what his biggest mistake was.
He was using too much leverage, which may be the biggest mistake new traders make.
There is only one guarantee in the business of trading and that is if you trade, you will have losing trades. How you manage those losing trades will have as much to do with your success or failure as a trader as any other factor. We recommend risking no more than 5% of your account balance at any one time. So if trading with a 50 pip risk, this new trader should have only opened two 10K lots instead of 20 lots. Then his loss would have been $100 instead of $500 and he would still in a frame of mind to find another trade instead of wondering if trying to trade was a mistake. His mistake was in thinking about how much he could make when he should have been thinking about how much he could lose. This is the main difference between a new trader and a professional trader.
The DailyFX+ Trading Coursehas a complete lesson on Money Management and how to keep your risk manageable.
The login is the same used to access your live FXCM account. Access is free for all live clients. If you are not yet an FXCM client, email us here at email@example.com and we can set you up with temporary access so you can see the type of resources we offer our live account holders.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.