Forex Trading Is A Tough Game If You Do Not Know These Rules

The folly of forex trading by most people is the LURE of low account size.

You can trade with 500, 1000, 1500 bucks! woo hoo!

The problem lies in a theory called the risk of ruin. The more leverage something has the higher the risk of ruin and the more money you will need just to have a chance at NOT LOSING ALL YOUR MONEY. This does not include making money, this is the opportunity to just stay in the game. Most people do not realize or think about what would happen if I lost 5, 10 or even 15 trades in a row. Can it happen - 100% yes, and it will. If your account is not big enough to easily absorb this, then the risk of ruin has plagued your account.

In general, you should not risk more than maybe 5% of your account in any one day on losses. This would give you about 20 days (assuming your loss level is fixed). As your account draws down, you will be forced to trade differently as you might not have the capital (or stomach) to make the same sized bets. What ends up happening is 5% of your account now is 10% of your account later on. The leverage of the forex market is consistent, and has nothing to do with the value of your account.

If you play 1 contract and lose $500.00 and your account had $10,000 in it, that is 5%. A month later your account has $5000, but the leverage is still the same, so you lose $500 and its not 5%, its 10%. The risk is increasing as your account size shrinks. Most places you cannot play less than a full contract (some places let you play mini contract sizes), but that is no matter. If you lose half your money using a normal contract and then switch to some hybrid mini contract, you will take twice as long if not more to ever get your account back just to even, and that does not even start to make you anything. People do not contemplate forced changes in behavior into their expected trading.

A lot of forex is leveraged 100:1 and some places as high as 400:1. Most traders do not even know how to compute the normal variance in price for periods of time. For example, what is the average high/low for the next 5 minutes, 10 min, 20 min, 60 min etc. I you do not know this and then are able to categorize todays trading vs this average, you will lose. This is just a normal oscillation in price, regardless of bet and trend. Any stop inside this range has a much higher chance of getting hit, whether you are day trading or planning to hold a bit.

Why? Easy - you will go in and a normal oscillation up or down will lose enough money to force you out. With a 1000 dollar account, its not hard to lose 10,20 even 30% of that on a single trade. Leverage works both ways, most traders only think of how much they can make. You did not even realize that when you put the trade on, with the amount in your account (which limits risk, market has no limits here) you are forced into a certain stop, whether you agree or not. No more money = no more position, the broker will close it out.

So you have your max stop, and then your desired stop, which keeps losses to a minimum. If this desired stop is anywhere inside the normal oscillation in price up and down, you have a much higher chance of it getting hit. So maybe you think you have a 20 or 30% chance of stop, but because your risk tolerance is off, its actually 70% and you do not know it. Bet against 70% odds over and over and you will lose all your money. Hell, the casinos in Las Vegas clean up to the tune of bilions a year with only a very slight house edge overall (< 15% blended). Going up against forex if you do not know what you are doing is a 70% house edge.

More money does not solve that edge, but is one part of it. Just like the market oscillating up and down, so will your account. You might easily have $2500.00 up and down swings with a 10,000 account, possibly more. And that is not by trading big size to the max, that is with conservative sizing so you can stay in the game while you learn to day trade. If you have way less than that, you are out of the game.

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