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Yet, it is always easier to say than to do. Most traders enter the FOREX market just to end up blowing their account and losing their hard-earn money. Only traders who acquire sufficient education can survive and be profitable in the market.
Trading Tips and Advice From Millionaire Traders
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The market allows traders to use vast amounts of financial risk, but in many cases, it is in a trader's best interest to limit the amount of leverage used. The amount of leverage available comes from the amount of margin that brokers require for each trade.
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Margin is simply a good faith deposit that you make to insulate the broker from potential losses on a trade. The bank pools the margin deposits into one very large margin deposit that it uses to make trades with the interbank market. Anyone that has ever had a trade go horribly wrong knows about the dreadful margin call, where brokers demand additional cash deposits; if they don't get them, they will sell the position at a loss to mitigate further losses or recoup their capital.
Many forex brokers require various amounts of margin, which translates into the following popular leverage ratios:. The reason many forex traders fail is that they are undercapitalized in relation to the size of the trades they make. It is either greed or the prospect of controlling vast amounts of money with only a small amount of capital that coerces forex traders to take on such huge and fragile financial risk.
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And every loss, even the small ones taken by being stopped out of a trade early, only exacerbates the problem by reducing the overall account balance and further increasing the leverage ratio. Not only does leverage magnify losses, but it also increases transaction costs as a percent of the account value.
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The higher the leverage, the higher the transaction costs as a percentage of the account value, and these costs increase as the account value drops. While the forex market is expected to be less volatile in the long term than the equity market, it is obvious that the inability to withstand periodic losses and the negative effect of those periodic losses through high leverage levels are a disaster waiting to happen.
These issues are compounded by the fact that the forex market contains a significant level of macroeconomic and political risks that can create short-term pricing inefficiencies and play havoc with the value of certain currency pairs. Many of the factors that cause forex traders to fail are similar to those that plague investors in other asset classes.
The simplest way to avoid some of these pitfalls is to build a relationship with other successful forex traders who can teach you the trading disciplines required by the asset class, including the risk and money management rules required to trade the forex market.
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Only then will you be able to plan appropriately and trade with the return expectations that keep you from taking an excessive risk for the potential benefits. While understanding the macroeconomic, technical, and fundamental analysis necessary for trading forex is as important as the requisite trading psychology , one of the largest factors that separates success from failure is a trader's ability to manage a trading account.
The keys to account management include making sure to be sufficiently capitalized, using appropriate trade sizing, and limiting financial risk by using smart leverage levels. Your Privacy Rights.
Top Reasons Forex Traders Fail
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Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Forex Market Trading Hazards. Managing Leverage.
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