The Dangers of Trading Forex: The Sharks and the Piranhas

Filed under: Learn Forex Trading |

 

Beware; the waters of forex are murky and dangerous so don’t go swimming unless you know exactly what is in there!

 

People are usually pretty good at spotting the big dangers when trading forex. For example, if you are risking 10% of your trading bank on a single trade – you will soon spot this when you have your first loss, as it will take a big chunk out of your trading bank – a shark bite! Other shark bites could come from not setting your stop losses – again, this will result in another big bite coming out of your trading bank. Not calculating your lots properly could also result in a similar shark bite. However, all of these problems are relatively easy to spot, just as a shark is because of its fin sticking above the water, and you will soon find a way to eradicate these problems.

 

However, it is the little constant bites that will do the most damage to your trading bank – and the worst thing is, the bites will be so small that you will hardly ever notice them until it is too late! These are what I like to call Piranha bites. They are almost invisible from afar and they nibble and nibble until there is nothing left.

 

One of the most piranha-like aspects of forex trading is that of your broker’s spread. The spread takes a little of your profit every time you trade. On the long-term charts, this could be just 1or 2% of your profits. On the short-term timeframes, it could account for 10 or 15% of your profits. Imagine if you were a high frequency trader on the 15-minute timeframe. In a month you trade well and make $2500 profit before the spread costs. However, you make three hundred trades with an average of $10 costs for each trade. You are now carrying a $500 loss. You have a trading edge, but that edge is nullified by the piranhas known as ‘the spread’.

 

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