Leverage Can Be Your Best Friend and Your Worst Enemy!

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 a standard account with a balance of $2000 and sold 10 lots of a currency pair where the value of each pip in each lot was $1. The market had moved against him by about 35 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 $400 on just one trade and thought that maybe he wasn’t cut out for trading. He asked if he sent me the details of the trade, would I offer comments on what went wrong. But I didn’t need any more details because I already identified his biggest mistake. 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 more to do with your success or failure as a trader than perhaps 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 standard lots instead of 10. Then his loss would have been $100 instead of $400 on the margin call 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 and needs to be part of your thought process on every trade. Keep your risk small, only trade the solid setups and let the profits take care of themself. This is how the experienced traders approach the market and should be how you approach the market too.

Written by Dailyfx.com