Oh, And You Lose On This Trade

Category: Finance.

This is the first in a series of insights into trading the forex markets successfully. We ll start with the top three with the rest detailed in the rest of this series. 1 Commission Free Trading.

We have ten keys to trading success that all new forex traders and certainly many experienced forex traders need to learn and need to know. This was the initial sales pitch most brokers used and many still do. "You ll trade for free- no commissions! " Well, any of us who trade actively know commissions add up to some ungodly amounts- many times you look at your annual statements if you trade actively and it s not uncommon that your broker makes more, than you do, maybe much more in your trading profits. Sure, there is usually not an" add- on" commission. Forex trading is not commission free. However, they force you to pay a spread on every trade. This is not the case in stocks, or futures or really any other market. You have to always buy at the ask and always sell at the bid.

This forced spread on every trade is a commission. Despite what the broker might claim. That s what it is. And that forced spread is not cheap. 3 pips is$ 30 on a just one full sized pair. Now, compare that to your average futures or stock trade. Try$ 50 on a 5 pip spread you still see as commonplace. Which is more?

Now, let s not leave it at that. Forex usually by far. Remember, you get some amazing leverage opportunities with Forex so the actual commission compared to the dollar volume you are able to trade is actually reasonable in some cases- assuming you trade at the right places and follow the right strategies. No, Wait! We ll cover that below. 1 100: 1 Leverage. How about 200: .or 400: 1?

With that kind of leverage you make just a few pips per days and you ll spend as much time with your banker as you do with your significant other, right? You re going to be rich! You look at the end of month totals from your strategy, run it through your state of the art Leverage Calculator and instantly you are making 100% , 300% or 500% per month. This is another one of those broker come- ons. Do that a few months, a bit of compounding and you ll be buying that private island after all. It just doesn t work this way.

The brokers are going to allow it so I m not saying it isn t as advertised. Yes, you can get this leverage. However, you are guaranteed to wipe out using it. There simply is no way you can trade at these leverage levels and make it. Guaranteed. Not unless you are some trading genius who can take a trade and never lose. For the rest of us, you are going to lose.

If you are- please contact me at once! You are going to lose more than once. It s the nature of trading. You are going to have some losing streaks. It s not a big deal, especially if you can win more than you lose, and if your average win is greater than your average loss. Don t get hung up on it.

You do that and who cares about some losses. However, you will care very much if you over- leverage. This is the single, greatest mistake most new Forex traders make. Do not over- leverage! Your state of the art trading calculator spits out numbers that are too great to pass up and you let greed get in the way of logic. You have a trade where you are targeting 25 pips and risking 25 pips. Think about it this way. 200: 1 leverage.

As you ll learn below, that trade actually has to go 28 pips or more to hit your target of 25 pips and you ll actually be risking 28 pips or more- but for this example we won t get hung up on that. You have a$ 5, 000 account and trade it with 200: 1 leverage. We ll solve that later. That means you can trade 1, 000 worth of, 000 currency( you can see why we said spreads above are a significant cost but with leverage can end up being a small percentage of cost) - and that means 10 full sized pairs. Let s do the math. 10 pairs x 25 pips= 250 pip loss. Oh, and you lose on this trade. Make that with spread 10 pairs x 28 pips= 280 pips loss x$ 10/ pip= $2800 loss.

You ve just lost over 50% of your account. Oops. Don t even think about what would have happened if you were risking more- and these days on the Forex, good luck risking much less. Sure, if you win you make a great return, but you are completely counting on virtually never losing. If you lose twice in a row- which happens all the time- you ve just wiped out. Even if you get a few wins immediately, you ll eventually wipe out.

They try a few hands, they get sucked, they win in, and then before they know it they are at their ATM machine looking for their mortgage money to try and get back that winning feeling. It s what happens to the new gambler in Las Vegas. You ll have success trading with huge leverage. It will be great and you ll brag to your friends how you made 50% that afternoon. Some of the time. Then, a few days later you ll be asking them to pick up the lunch tab. Do not use crazy leverage.

Do not use crazy leverage. Do not use. ok, you get the idea. And calculate that amount to determine what size you can trade based upon the risk per trade. Decide on a fixed percentage you are going to risk on your account on any one trade. 5% ? 10% ? It will still be great leverage- Forex provides that. It blows away the stock market but it s not going to wipe you out in a couple of trades. 1 Spreads. What s wrong with 5: 1 leverage or 10: 1 leverage?

Find a broker that does not charge high spreads. But realize these brokers make money many different ways. Sure, you need a broker who provides a stable platform, which provides good customer service, which is regulated( important! ), that has account insurance/ guarantees, and so on. They make spread money, they make money by laying off orders on other banks, they make money on stop running. Guess it s too late to take it back. Did I say that?

There is simply no reason to pay more than 3 pips on the EURUSD. On the GBPUSD and USDCHF why are you paying 5 pips? And really, you should be paying 2 pips. Sorry, it s not going to a charitable cause- your broker s bank account isn t a non- profit. You should pay 3, maybe 4 at most on the other majors. Those spreads are crazy. There are new trading platforms coming out in recent months, some based upon the" Currenex" platform that basically takes your orders direct to the" real" trading market and your broker only takes a small commission on the trade, closer to the model we see in stocks and futures.

Look for this. Or they are mimicking the Currenex platform and developing on that works similar. It is important to have liquidity and low costs. And stay away unless spread is 2 or 3 pips, maybe That s already more than enough to trade so why do you need to trade the GBPCHF for 15 pips spread? And forget about all the" exotics" - avoid trading anything that is not amongst the main pairs- EURUSD, GBPUSD, USDCHF, USDCAD, USDJPY, AUDUSD, EURJPY and maybe EURGBP. Unless you really like to make car payments and pay for rounds of golf for your broker.

The rest of this important top 10 with critical insight into ensuring your forex trading success can be found here: http: //www. netpicks. com/ BetterTrading. html If you do see a compelling reason to trade, the GBPJPY, for example- and there are some great moves there- just be sure you are building the spread costs into your trading outcomes- you might need it to go 7 to 10 pips just to get break- even, let alone to start making a profit.

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