By: Sara Patterson
If there is one thing that characterizes the Forex market and even differentiates it from other financial markets, it is the constant promise of wealth being issued to Forex traders by the brokers. In fact, these promises not only separate the Forex market, they actually cause damage to the image of the entire market.
While the potential for great wealth is very much present, the current statistics indicate that a very high percentage of traders actually end up losing their money. This, of course, does not stop the brokers from making false promises, and it is the trader’s responsibility to take it all with a grain of salt.
There are endless tools and resources available to traders that will assist them in achieving Forex success, or better yet, in avoiding Forex failure. Such resources include online and offline articles, Forex news, Forex market analysis, trading strategies, money management, and much more.
In this specific article, we are going to focus on one aspect of Forex trading, that when followed, can become the difference between complete failure and ultimate success in Forex trading.
Measuring Your Risk
The big question Forex traders ask is how much to risk? Let’s say, for example, there is a big announcement that day, and a trader is convinced the market will respond a certain way. The trader does their necessary research, and concludes that there is a lot of money to be made from this Forex position.
Now the question arises, should that trader leverage the position with a high leverage of 400:1 or more? Perhaps, they should risk their entire account on this one trade, since the higher the risk, the more potential for profit?
The answer is an across-the-board no. Experts all agree that a crucial part of Forex trading is effective account management. You might be sure that this trade will be a successful one, and you might be tempted to put all your eggs into this one basket, but it is not a good idea. In fact, even if you are right about this one trade, and you end up kicking yourself that you did not go in heavier, trading with lower risk will ultimately make you a better trader.
Looking at Leverage
The one thing that most brokers forget to mention is that Forex leverage, in addition to raising the bar for potential profit, also brings with it more risk accordingly. The higher the leverage, the higher the potential profit, but do not forget that the risk also goes up.
Think of leverage as a mortgage. You are in essence trading the broker’s money, and if you lose the trade, you lose more since your trade was that much bigger thanks to the broker’s loan.
The recommended percentage is to risk 2% of your entire trading account per trade. That way, even when you lose, and you will lose, we all do, you can carry on trading with the rest of your account, which was not wiped out by this one loss.