How many of you were lured into the world of Forex Trading because you read that overnight windfall or fortunes were made? Or maybe you read or heard that making 50 -100% every month was achievable. Maybe you 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 what you heard were just empty promises.Sorry but let me greet you with a harsh reality.
Most traders out there can’t achieve the above mentioned. I will even openly say I can’t achieve 20% consistently every month. For me I am a swing trader., so my setup does not appear everyday. Sometimes I just do 1 trade per week or at most 2 trades a week. So let’s do the maths. If I risk and earn 2% and 4% respectively for every trade and my winning probability 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 previous figures, my returns will be about 8% a month. Even just by making 4% every month, on an annual basis that will be 48%pa. Doesn’t that sounds good, it certainly sounds good to me when fixed deposit in Singapore is paying less than 0.5%pa. So back to the 20%/month topic, in order to achieve this kind of returns, I will need to take 5 trades every month and all my trades have to be right. The question is how many traders out there can be 80% right in their trades?
Next thing I would like to share will be leveraging. If you read about making $10k in 3 weeks just by using $500, what do think make this returns possible other than leverage. And true enough Forex trading offers the highest leverage you can ever find, it can go as high as 400:1 for some brokerages. That means if you have a capital of $500. you can trade $200,000 worth of currencies. Let me put it in a more ‘conservative’ manner, assuming I am just using a leverage of 100:1, this means I can trade about $50.000 worth of currencies. Let’s say the currencies move in your favor by 0.5% which is not uncommon daily, that means I made $50,000 x 0.5% = $250. That’s a return of 50% of your capital in one day!! 50% return all in a day’s work. Sounds good isn’t it? Heard the saying that leverage is a double edged sword? And in the world of Forex trading, there is no such thing as 100%. So if the currency move against, you lose 50% of your capital and you will just need 1 more losing trade to blow 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 why I am sharing this is because I recently got to know a person who has many years of experience dealing with financial products through my friend. My friend told me he had blown his $20,000 account and that certainly caught me by surprise. How could this happen if you stick to your fixed risk every trade!? You will need to lose 50 times in a row to blow your account if you risked $200 every trade and even Bobcats don’t do that badly. The next thing my friend told me was that her friend asked how much leverage do I used to trade. How much I can leverage is certainly the last thing on my mind as i just trade based on my fixed risk per trade and I trade according to position sizing. The reason she blown her account was because she used her capital of $20,000 to trade $2,000,000 worth of currency, all that is needed was a 1% fluctuation against you and your $20k is gone.
The moral of the story is Forex trading is definitely not like what some advertisements made out to be where big money can be made quickly. Remember if such good returns can be achieved in such a short time, don’t you think that you will also lose the money back in a short time?
Learn to trade with realistic expectations and you are on the right track to a successful Forex trading endeavor!
by Derek Lim