Forex: The Dangers of Trading Large Sums of Money

Filed under: Learn Forex Trading |

When you are trading forex, you are essentially borrowing large sums of money to trade with from your broker. If you simply traded with $1000 or even $10,000, the minute changes in the exchange rate would mean that trading would be next to pointless. Therefore, you have to trade with $100,000, or perhaps even more, to make decent profits.

 

However, trading with such vast sums of money can be dangerous. If you do not set guaranteed stop losses and the market becomes volatile due to an unusual news event, then you could lose a lot of money. This is why learning to calculate your position sizes and setting stop losses are extremely important. If you do not understand these issues, then you should practice on a demo account until you are fully versed in both lot sizes and setting stop losses.

 

It is easy to get carried away when trading for the first time, but if you are not careful, you will soon get a margin call. This is when there is not enough money in your account to cover a trade. If this happens, all of your trades will be closed regardless of whether they are currently in profit or not.

 

Due to all of these factors, it is very important to understand position sizes, risk, and to implement a strict regime of money management. This means never risking more than X% on a single trade (with a maximum of 2% being a consensual figure). There are so many potential pitfalls in forex that you really should not even think about trading on a live account until you have significant experience on a demo account. One thing you really do need in forex trading is patience, and you would do well to exercise this patience right from the outset.

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