How many of you were drawn to the world of Forex Trading because you read that fortunes or windfall profits were made overnight? Or maybe you read or heard that 50-100% could be achieved each month. Perhaps you have also read that with a capital of $ 500 you can turn it into $ 10,000 in 3 weeks. And how many of you were demoralized and gave up when you realized that what you heard were empty promises.
Most merchants cannot achieve the above. I will even openly say that I can’t consistently hit 20% every month. For me, I am a swing trader, so my settings do not appear every day. Sometimes I only do 1 trade per week or at most 2 trades per week. So let’s do the math. If I risk and win 2% and 4% respectively for each trade and my probability of winning is 50%. If I trade 4 times a month, my return will be 4% every month. If I were to trade 8 times a month, using the figures above, my returns would be about 8% a month. Even if you only earn 4% each month, on an annual basis it will be 48% annually. It does’nt sound good? It certainly sounds good to me when the fixed deposit in Singapore is paying less than 0.5% per annum. So back to the 20% / month topic, to achieve this type of returns I will need to do 5 trades each month and all my trades must be correct. The question is how many traders can have 80% success in their operations?
The next thing I would like to share is leverage. If you read about earning $ 10k in 3 weeks just by using $ 500, what do you think makes these returns possible besides leverage? And it is true that Forex trading offers the highest leverage you can find, it can go up to 400: 1 for some brokerages. That means if you have a capital of $ 500, you can trade currencies worth $ 200,000. Let me put it in a more ‘conservative’ way, assuming I’m only using 100: 1 leverage, this means I can trade around $ 50,000 worth of coins. Let’s say the coins are moving in your favor by 0.5%, which is not uncommon every day, that means I made $ 50,000 x 0.5% = $ 250. That’s a 50% return! of your capital in one day !! 50% return all in one working day. Sounds good right? Did you hear the saying that leverage is a double-edged sword? And in the world of Forex trading, there is no 100%. So if the currency moves against you, you will lose 50% of your capital and only need 1 more losing trade to blow up your account. Always remember as a trader, your capital is your ammunition. You have to learn to preserve it to fight the battle.
The reason I am sharing this is because I recently met a person who has many years of experience in handling financial products through my friend. My friend told me that he had ruined his $ 20,000 account and that certainly took me by surprise. How could this happen if you stick to your fixed risk on every trade? You will have to lose 50 times in a row to ruin your account if you risked $ 200 on each trade and even the Bobcats don’t get it wrong. The next thing my friend told me was that her friend asked me how much leverage I used to trade. How much I can leverage is definitely the last thing on my mind, as I simply trade based on my fixed risk per trade and trade based on the size of the position. The reason you screwed up your account was because you used your $ 20,000 equity to trade $ 2,000,000 in currency, all that was needed was a 1% fluctuation against you and your $ 20k is gone.
The moral of the story is that forex trading is definitely not what some advertisements pretended to be where you can make a lot of money quickly. Remember that if such good returns can be achieved in such a short time, don’t you think that you will also lose money in a short time?
Learn to trade with realistic expectations and you will be well on your way to a successful Forex trading endeavor!