Trading Mistake 1 Over leveraging. The misuse of leverage is the single biggest killer of traders. It is intoxicating, plays to the snake-oil salesmen who want to convince you that you can be a millionaire in a month if you use it, and is readily available. However, it is also the single fastest killer of aspiring retail FX traders trading accounts and so makes it to my number 1 spot of trading mistakes to avoid.

A powerful weapon in the wrong hands. Every now and then you hear of a disaster that happens because an item of equipment is too powerful for its user. I remember reading a very sad case of a person who was firing a very powerful automatic weapon on a shooting range in the US. The re-coil from the weapon was so strong that the inexperienced person sadly ended up shooting themselves by accident. It was a tragic mistake to put such a powerful weapon in a inexperienced person's hands without proper training.

The misuse of leverage can be sometimes compared to this, a weapon that can end up destroying you. The good news is that it doesn't have to be this way. So, some may ask, what actually is leverage? Leverage is simply the ability to trade a position sizes larger than your account siz e. Think of your account size vs your account size. If you have a 10, USD size account then trading without leverage will involve trading a lot size that is equivalent to your account size.

It takes putting yourself in the situation a huge amount of times to ensure you handle the decision correctly. Skipping this step is guaranteed to lead to you blowing your forex account over the long run.

Risk management and rock solid psychology is the only thing that sets profitable traders apart from those traders that lose a huge amount of their accounts. New forex traders like to speed through the learning process because they think they need to get started trading live.

Years spent on education is years wasted, right? Instead of you rushing the learning process in 4 months, blowing a few live accounts then trying to rapidly compound your trading account — what if you just got funded. This is a much faster way to become a professional trader, rather than rushing your education process. The MOST common mistake that drags out the learning process is changing strategies constantly. I would have been profitable years earlier if I had stuck to one forex trading strategy.

I recommend trying to stick to one trading strategy and maybe just making small refinements, if any. Management of your expectations is a crucial part of forex trading and so is avoiding shiny ball syndrome.

One of the largest mistakes that causes people to take a lot longer to learn forex is only focusing on technical analysis. This is fundamentally not true. Once you can do this and your risk management is perfect, get funding from FTMO and start your trading career. One of the largest mistakes made by people trying to learn to trade forex is not backtesting a strategy.

Backtesting is absolutely crucial to the success of a trader in the markets. Without knowing the objective facts about your trading strategy, there is no proof the system is profitable.

When backtesting, you need to be completely objective and critical in the results. For people learning a forex trading strategy, I would recommend getting at least 5 years of backtested results. This should all be displayed in a spreadsheet with comments, percentages, times, days, drawdown and screenshots. You should have complete faith in a strategy once a backtest is complete. This process massively speeds up the learning process too, as you expose yourself to the same setup thousands of times.

Forex Leverage and Trade Size. The Risks of Leverage. Key Takeaways Leverage, which is the use of borrowed money to invest, is very common in forex trading.

However, leverage is a double-edged sword, meaning it can also magnify losses. Many brokers require a percentage of a trade to be held in cash as collateral, and that requirement can be higher for certain currencies.

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Futures and Commodities Trading How to Trade Futures: Platforms, Strategies, and Pros and Cons. Partner Links. Related Terms. Foreign Exchange Market: How It Works, History, and Pros and Cons The foreign exchange market is an over-the-counter OTC marketplace that determines the exchange rate for global currencies.

Forex FX : How Trading in the Foreign Exchange Market Works The foreign exchange, or Forex, is a decentralized marketplace for the trading of the world's currencies. Margin and Margin Trading Explained Plus Advantages and Disadvantages Margin is the money borrowed from a broker to purchase an investment and is the difference between the total value of the investment and the loan amount.

Interest Rate Differential IRD Definition and Examples An interest rate differential IRD measures the gap in interest rates between two similar interest-bearing assets. Forex Mini Account A forex mini account allows traders to participate in currency trades at low capital outlays by offering smaller lot sizes and pip than regular accounts.

What Is Financial Leverage, and Why Is It Important? Leverage results from using borrowed capital as a source of funding when investing to expand a firm's asset base and generate returns on risk capital.

As you trader you would definitely have heard about leverage, and very likely used it in your trades. You invest a certain amount with your broker and your broker may allow certain leverage limits to you. Leverage allows to magnify potential profits, which is the main reason why inexperienced traders are drawn to use high leverages without considering the risks. This is mainly due to the losses incurred by traders by using high leverage limits.

For example, if you think that EUR will rise against USD, then you can place a buy order on EURUSD, and profit from the difference. But most traders have lesser capital to make any substantial gains. That is where CFD brokers offer leverage. By borrowing from your broker, you will be able to take bigger positions in the market by just investing between 0. For example, hypothetically your broker gives you a leverage of In case the markets are not favourable to you, and you lose money in the trade, you could end up being liable to pay up a lot more than what you put as your margin.

Although, through features such as stop-loss, you can decide to automatically cut your position if the loss is going behind what you can cover.

There are other terms that you might come across while trading CFDs using leverage. It is connected to the leverage that you want to use. The margin is usually a percentage of the position you are willing to take. The percentage however differs from broker to broker but it varies between 0. This is a warning given to the trader to either put up more margin money or the broker will automatically close the trading position.

In order for you to hold your position, the broker will ask you to deposit more money. If you are unable to deposit within a specific amount of time then your open positions be automatically closed.

Given the risks of leverage, currently there are several restrictions which have been introduced by FCA, ESMA, ASIC and some other regulators around the world to reduce leverage limits allowed for retail-traders due to its high-risk nature.

The Forex market is highly volatile, this requires you to constantly monitor your positions. The problem with leverage is that within a matter of seconds, you can either gain profit or see a big loss, compared to your invested capital.

John does his research and concludes that US Dollar would drop due to lower demand compared to EUR. John will lose approx. In this example, with , John would lose his entire trading capital on a single trade. Some brokers offer very higher leverage of as high as or more, which is even riskier.

Considering how many people were losing money due to high leverage limits, the regulators in major countries like UK, EU, Australia, decided to step in to mitigate this damage. During which over 1. ASIC had proposed the restrictions on CFDs in which mirrored regulations the CFD restrictions by ESMA. Following the public consultations from all stakeholders in , ASIC delayed the rollout of these restrictions. The maximum leverage which was decided was for major forex pairs. The leverage is even lower for other CFD instruments, given their risks.

The FCA projects that the restrictions in leverage will help reduce losses between £ million and £ million every year. But since, ASIC has now also implemented the regulations many Australian brokers are welcoming this move and are keen on making necessary changes to remain complaint. Many experts believe that this will bring awareness among traders about the risks in the long run, and brokers will be encouraged to offer safe offerings.

The retail trading industry will be more organised and gain credibility as more professional traders will enter the market and market will balance itself out. But, still there are many brokers that offer much higher leverage. Similarly, CMA regulated forex brokers in Kenya also offer similar leverage levels. With more and more countries bringing in regulations to protect traders, we can expect to see changes in the upcoming years.

But the problem with leverage restrictions is that if experienced traders want a higher leverage, they can still get it with offshore brokers. There are also the other charges such as transaction fee, withdrawal fees and so on. As your trading volume increases, the fees and the commission charges also increase. So, your breakeven point keeps getting higher and higher even with higher leverage levels.

You will need to reach a particular target price to ensure that you make a profit. So, there will be constant pressure on you to break even in order for you to pay your broker. This will indirectly affect the way you trade. So, it should be in your best interest to consider safe or no leverage. When a broker offers you higher leverage levels, they are trying to induce you and make bigger profits from your trade.

This is why regulations exist to protect traders from such unethical brokers. In fact, next time you across a broker who offers you ratios such as or higher than that, have a look at their address and where they are located. Check if the country they are located in have a regulator at all and check if they are authorised to be a broker in your country.

All regulators around the globe are working together to curb the losses generated within the CFD trading industry. Another reason why regulators work together is because of offshore brokers. They can easily cheat traders without having to worry about being penalised. The strategy that many offshore brokers adopt is that they never carry out the orders to liquidity providers, and instead take the opposite side of a trade, Given the knowledge that most traders lose, they just wait for the trader to deplete their account.

This way they will get the complete deposit of the trader as their profit. Well-known brokers will need to ensure that withdrawals happen quickly but the same is not the case with offshore brokers. Most of the times you will not be able to withdraw your funds and you are forced to use your funds to trade. Leverage is considered as a 'double edged sword'.

This is mainly due to the losses incurred by traders…. Home » What is Leverage in Forex Trading? Understand the Risks. Guest Updated: 24 March What is Leverage in Forex? What is Margin? What is Margin Call? The Risks of Leverage The Forex market is highly volatile, this requires you to constantly monitor your positions. Guest View All Post By Guest. Forex Basics. Read Next. Regulated Forex Brokers All Brokers.

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To avoid a catastrophe, forex traders usually implement a strict trading style that includes the use of stop-loss orders to control potential losses. There are also the other charges such as transaction fee, withdrawal fees and so on. For this, we have got you covered. The retail trading industry will be more organised and gain credibility as more professional traders will enter the market and market will balance itself out. The re-coil from the weapon was so strong that the inexperienced person sadly ended up shooting themselves by accident. Without knowing the objective facts about your trading strategy, there is no proof the system is profitable. These are just some of the factors.

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