Forex margin trading allows for control of large currency amounts with small investments, but requires a money management system to control risk exposure. Money management plans should be based on acceptable risk per trade and professional traders use them. The maximum loss per trade should be set at no more than 5% of the account value. The size of the trade is determined by the maximum loss per trade. The trader must be prepared to bear losses and use a money management plan. Margin should be selected to suit the money management plan used.
Forex margin trading allows the investor to control large amounts of currency with a small capital investment. In order to successfully trade this market, the trader must be equipped with a money management system. The forex market is a highly volatile market. Big swings in price are common in very short periods of time. Money management techniques should be used to control risk exposure in forex margin trading.
Using margin will magnify both your losses and your profits. Discretionary or system trading is not advisable without a well thought out plan for capital preservation. The trader may experience a series of losing trades which is quite common in the forex market. The amount of principal lost is called a withdrawal. The maximum withdrawal of the account value must be determined before margin trading on forex.
When opening a forex margin trading account, the broker and trader agree on the amount of margin to be used. Currency trading offers the highest margin rates available. Novice traders may be attracted by the potential to make big profits with a small capital investment. Without taking forex volatility into consideration, the trader could be risking a large percentage of the account value on a single trade.
The best risk aversion technique is to use a money management plan. The plan should be based on an acceptable risk per trade. Each operation should be given the same weight without exception. All professional traders use a money management system. Trading without it is no different than gambling.
Even though most brokers offer margin call protection for traders, the amount of loss could exceed the total value of the account. Your money management plan should be developed with a worst-case scenario in mind. System traders should trade a well-tested system. Back testing should provide the maximum drawdown a system will experience. The system should be traded under the same market conditions in which it was developed and tested.
Trade size and stop loss orders are determined using the money management system. The maximum loss per trade should be set at no more than approximately 5% of the account value. A value of around 2% would be more reasonable. The following example will use the maximum loss per trade set to 5%.
With an account opening value of $2,000 US Dollars (USD) the maximum loss per trade would be set at 5 percent, or $100 USD. If your trading system calls for a stop loss set at 33 pips, your trade size would be $3 USD per pip. Using this system, a losing trade would generate a loss of 33 pips per $3 USD per pip or a loss of $99 USD. The size of the trade is determined by the maximum loss per trade.
Before entering a trade, it is much more important for the investor to know how much he can lose than how much he can gain. A series of losses is highly likely in forex margin trading. The trader must be prepared to bear these losses with the ability to continue trading. The only way this is possible is through the use of a money management plan.
No matter how much margin the trader selects, it doesn’t matter if it is not used. The amount of trading capital used in the above example with a margin rate of 50:1 would be between $600 USD and $966 USD, depending on the pair traded. The above trade would not be possible with a trading account value of $2,000 USD and a margin rate of 10:1. The money management system determines the trading rules. Margin should be selected to suit the money management plan used.
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