Time and time again I hear the statement that trading on a
margin account is a risky business. In fact the NFA and
CFTC require that all brokers and agents inform the public
of the risks of trading on the foreign exchange.
So how much risk is actually involved in trading Forex? Is
it any riskier than engaging in any other kind of business?
Let us first look at the hypothetical case of John and
Mary. Each of them opened a forex trading account and
funded it with $50,000. Both of them operated on a margin
set at 100:1
John traded very conservatively using one regular lot per
trade and applying reasonable money management principals.
Unfortunately, John was a poor decision maker and did
little to improve his trading skills. Over a period of
time, John lost his entire investment.
Mary had no intention of being shackled by the constraints
of money management and traded to the maximum of her
account margin, each trade carrying the maximum lot size
permitted. After a few spectacular gains, Mary's luck ran
out and her account was wiped out. Despite being in profit
to the tune of $2,500,000 she had lost it all and her
original investment was gone too.
So who took the most risk?
If you answered Mary - you are wrong!
Mary is a multi-millionaire. She has several mansions two
yachts and a private jet. Her main income is from oil and
her company owns some of the largest oil reserves in the
world. The possibility of losing $50,000 for Mary is a very
small risk. It is similar for her to that of anyone
purchasing a lottery ticket - nice if it gives you a few
million dollars, but no big deal if it doesn't.
John on the other hand was in a very different situation.
John had taken a mortgage on his house to fund his trading
account. He had no savings and had even given up his job to
start full time trading.
As you can see from the two tales above, risk is about more
than what percentage of your account you put at risk.
In our next example, Mike and Sarah both open mini accounts
with $5,000. Both are using a margin of 100:1. Neither Mike
nor Sarah are independently wealthy but each can easily
afford to lose their $5000 without it adversely affecting
their lives.
Both start trading and due to lack of experience do not
fare very well. After a short time Mike stops live trading
and starts to practice in a demo account. Mike seeks help
and knowledge and then practices in his demo account to
hone those new found skills.
When Mike starts to trade his live account again he uses
very strict money management and a well developed trading
system. Mike has not yet made a fortune, but he is starting
to recover some of the investment that he lost.
Sarah continued to trade without any help. She is still
managing to stay afloat.
So who was at the most risk in this example? I would
suggest that it was Sarah. Her luck is still holding but if
your trading style is built upon luck. You are at great
risk.
Trading the forex market requires that you develop a style
of risk management. It is necessary to understand the true
risk of each trade as it applies to both the market in
general and to you in particular.
If you always trade with money that you can afford to lose,
your total risk is reduced. If you learn how to trade
effectively, then your risk is further reduced and likewise
if you adopt a strict regime of money management your risk
is again reduced.
Trading will always carry a level of risk. If you intend to
adopt trading as a career or investment vehicle, it is up
to you to do everything in your power to learn how to
properly assess and manage the risk.
----------------------------------------------------
Martin Bottomley is a full time professional forex trader,
acknowledged author, forex tutor and co-developer of forex
trading software including The Amazing Stealth Forex
Trading system.
You will find more information at:
http://www.stealthforex.com
No comments:
Post a Comment