Everyone comes to the Forex market for a reason, ranging between solely for entertainment to becoming a professional trader. I started out aspiring to be a full-time, self sufficient Forex trader. I had been taught the 'perfect' strategy.
My plan was to let my account compound until I was so well off, I wouldn't have to work again in my life. Sparing you the details, my plan failed. I didn't know what hit me. I spent the next couple of years working with traders around the world and continued to educate myself about the Forex market.
It played a huge role in my development to be the trader I am today. The point of me telling this story is because I think many traders can relate to starting off in this market, not seeing the results that they expected and not understanding why.
These are the 3 things I wish I knew when I started trading Forex. The amount we can earn is determined more by the amount of money we are risking rather than how good our strategy is. The difference is that they have slowly developed over time and increased their account to a level that can create sustainable income.
That's a true statement if you have a strategy with a trading edge. Your expected return should be positive , but without leverage, it is going to be a relatively tiny amount. And during times of bad luck, we can still have losing streaks. When we throw leverage into the mix, that's how traders attempt to target those excessive gains.
Which in turn is how traders can produce excessive losses. Leverage is beneficial up to point, but not when it can turn a winning strategy into a loser. This is a lesson I wish I had learned earlier. Excessive leverage can ruin an otherwise profitable strategy.
Would you flip that coin? My guess is absolutely you would flip that coin. You'd want to flip it over and over. Now let's say I have the same coin, but this time if heads is hit, you would triple your net worth; but when tails was hit, you would lose every possession you own.
My guess is you would not because one bad flip of the coin would ruin your life. Even though you have the exact same percentage advantage in this example as the example above, no one in their right mind would flip this coin. The second example is how many Forex traders view their trading account. They go "all-in" on one or two trades and end up losing their entire account. Even if their trades had an edge like our coin flipping example, it only takes one or two unlucky trades to wipe them out completely.
This is how leverage can cause a winning strategy to lose money. So how can we fix this? A good start is by using no more than 10x effective leverage.
The 3rd lesson I've learned should come as no surprise to those that follow my articles. I've written many articles about this topic. It's the best tool I've ever used and is still a part of almost every trading strategy I am using, present day. SSI is a free tool that can be found here that tells us how many traders are long compared to how many traders are short each major currency pair. It's meant to be used as a contrarian index where we want to do the opposite of what everyone else is doing.
Using it as a direction filter for my trades has turned my trading career completely around. If I could tell my younger self 3 things before I began trading Forex, this would be the list I would give. I hope they help your trading as much as its helped mine. Are you new to FX trading? We created this guide just for you. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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