I constantly read articles about the advantages of forex trading but these are actually disadvantages for most traders and that’s why 95% of traders lose all their equity quickly and here we will look at the two specific reasons, most forex traders lose…
1. Leverage
Today, you can leverage your investment with an online forex broker by 200, or even 400 to 1 and this creates tremendous profit potential – but it’s a fact that most traders actually over leverage and lose.
With leverage you need to be very accurate with the execution of your trading signals and very careful with your stop loss protection. When trading on leverage if you are not careful, a quick equity spike will wipe your position.
In stock trading you can buy and hold and you only risk what you have paid for the stock and so long as it comes back you make a profit and you can wait.
In forex trading its different – you have losses that are open ended and they pile up quickly. You can’t just sit back – you need to take action.
As most traders lack discipline, they very often hope a position turns around and don’t have a get out point. A small loss soon ends up being a big loss and their equity is gone. Most traders hate admitting their wrong – they want the big profit potential leverage gives them but don’t think about the downside.
2. Volatility
Forex prices are volatile and make big moves everyday – combine this with leverage and you have a powerful tool for profits which of course can also cause losses.
Most traders have no idea about how volatility affects their trading and how to deal with it. Most forex traders have never heard of, let alone understand “standard deviation of price” yet it’s an essential part of any traders forex education.
You have to know what is normal volatility and what isn’t, to have any hope of succeeding with your forex trading strategy.
Most traders make the error of placing stops to close to their entry point and they get taken out by normal volatility and this is because they are normally over leveraged.
Most traders try so hard to avoid risk they actually create it for themselves.
The way to make money in forex trading is:
Use low leverage and stops outside of normal volatility – NOT high leverage and stops within normal volatility.
In forex trading seeing the longer term trends on a forex chart is easy – making money from them is anything but. The correct execution of trading signals, in line with the odds and placing of sensible stops is what separates the winners who pile up big profits from the rest.
Forex trading is high risk / high reward – the bigger the risk the bigger the reward – period. You need to be aware that you need to manage risk and build your own set of rules within your forex trading system to combat it.
REMEMBER
The advantages of currency trading can be disadvantages as we have seen and you need to think lower leverage wider stops rather than higher leverage closer stops. Most traders do the latter and get wiped out quickly don’t make the same mistake.