Trader’s work is believed to involve high risk. Any trader is to take trading decisions in the circumstances of high uncertainty and controversial trading signals. It is almost impossible to predict a trend with 100-percent certainty, for rapid movements and other factors that complicate trade frequently happen at the market.
However, risk at exchange trade is no higher than in any other business. In order to understand this, let us define trader’s risks in the course of trading activity:
- health-related risks, stresses, and others are not exceptional, for they are characteristic of any business;
- the risk of choosing a dishonest partner (broker, DC) neither is an out of ordinary factor;
- force majeure that may occur in any type of activity.
A trader risks the part of capital that he has invested into a certain deal (deals). The risk of losing one’s capital will be smaller if one invests a small part of the capital into deals with high ratio between possible income and risk.
So, why do so many beginning forex traders lose all money from their trading accounts? The issue has been studied by the analysts of “Forex News” and “Exchange News” departments of the “Market Leader” and experts of Masterforex-V Academy.
Masterforex-V Traders: High Risk is Main Reason of Loss
Many would say that the reason lies in psychology. This is truly so, but only to some extent. The main reason lies in the fact that beginning traders undertake extremely high risks when opening deals.
As a rule, a beginner open the first real account to a small sum, but is obliged to use credit leverage in the course of trade. A DC willingly provides a credit leverage of up to 1:500 (bearing a good understanding of how dangerous this is for a trader, and how safe for a DC).
Craftiness of credit leverage lies in the fact that when the price moves against a trader’s open position in most unfavourable situation there will happen a forced closing of the deal (margin call), and a minimal sum will then stay at the account. The trader will lose almost everything, whereas the DC will earn anyway, at least from a spread (difference between the price of buying and selling).
In order to avoid margin calls, forex traders use safety orders (stop-loss), which limits the loss.
Let us remind that this concerns beginners and trade from small accounts. Having worked at a demo account and having gained some experience, a beginning trader chooses a partner (as a rule, a DC) and opens the first real account, usually for a small sum.
Choosing the size of the account is an intricate process. Correct thinking would be the following: as far as there is no experience of real trade, one should invest into a deal such sum, the loss of which will not result in drastic consequences. To put it more simply, the sum that one is ready to spend on gaining experience.
“Invest into a deal” is a non-random phrase. One’s attitude to trading should from the very beginning be like to one’s own business. Here you perform all functions on your own, and at the very beginning traders will face a difficulty: as a rule, there is no experience of taking decisions without external control. In everyday life there always exists a number of rules and limitations that one is obliged to follow willingly or unwillingly. They usually concern the following:
- labour order,
- accident prevention,
- traffic regulations,
- and much more.
Trading has only one limitation: size of your trading account. In order to have wise management over it, one would have to create (which is not very difficult) and strictly follow (which is much harder, for it is easy to let yourself break a rule at least once) these limitations.
As an example, let us see the results of trader’s monthly work, which includes some part of deals and a concluding chart. There has been applied the tactics of gaining small positions and locks, mostly positive. Out of 114 deals only three have proved loss-making, and the deposit has increased by 61 percent:
For the full understanding of the process we will have to work with numbers. Let us assume that a trader has summed up the results of a certain period of demo trade. He has found out that there have been 5 loss-making deals in a row in the course of working by this trading system, as a result of which he has gained certain income for the whole period.
Now let us make a small digression:
1. When trading from a demo account one should rather treat it as a real one, therefore, its size should be similar to the one of the future real account.
2. Second step – setting acceptable loss from one deal. Let us take 10 US dollars as an example. It may actually be smaller or bigger; the only point is that it is strictly followed.
Therefore, in case of 5 loss-making deals in a row a trader may lose 50 US dollars from his trading account.
50 US dollars is an acceptable loss for a certain period.
3. Third step – how many losses in a row are acceptable before one stops trading. Let us take 2 times as an example, but there can be more or less. Maximal size of the possible loss then amounts to 100 US dollars.
This figure will serve as a basis for defining the size of the first real account. One should open a real account to the sum, which is several times higher than the set maximal size of loss. If in the course of trading a trader reaches the set limitations, he should quit trade and decide on further actions. There are several options: switch into demo trade in order to eliminate the reasons of loss, undergo training, replenish a trading account, other.
Strict limitations should also be set for successful trade during a certain period: what to do with gained income, increasing possible risk and loss for the next period or not, etc.
To conclude let us see a specific example of how and why beginning traders increase risk.
Real account amounts to 300 US dollars; risk in one deal is 15 US dollars, which amounts to 5 percent of real account. In case of two loss-making deals in a row there will remain 270 US dollars on the account, provided that the size of risk in one deal remains at the point of 15 US dollars, which will amount to 5.6 percent from the size of the account, and in case of four loss-making deals in a row – to 6.3 percent. If risk is kept at the point of 5 percent, the size of risk and, consequently, the size of position (lot) will have to be reduced. In other words, in order to return what has been lost a trader will have to effect more successful deals in a row than loss-making ones. At this point psychology enters the game, to be more exact, readiness to correct actions in intricate circumstances.
How to calculate the size of position (lot) in a certain deal?
1. Find out the price of one point at the chosen tool (currency pair).
It can be calculated by a formula in trading conditions or in a more simply way: open a trading position (buy or sell) on a demo account at the chosen pair with 1 lot and see what sum is added (decreased) when the price is moved by 1 point.
For EURUSD currency pair the price of 1 point amounts to 10 US dollars.
This means that by opening a deal with 1 standard lot you may earn (lose) 10 US dollars from every point of price movement.
2. Calculate a stopping point for a certain deal following the rules of your trading system. Let us assume that stop is 50 points.
3. Further follows simple arithmetic: size of risk (set by you at the point of 15 US dollars) is divided into size of stop, multiplied by the price of one point.
15: (50х10) = 0.03 lot.
More details about risks, rules of trade, and actions in intricate circumstances will be provided in the course of an open webinar, organized by MasterForex-V Academy.
The webinar is held by the Department of Synergic Volume and Wave Analysis (SVWA) of Masterforex-V Academy on June 12 at 19.00 Moscow time.
The program of the webinar may be found by this link (post # 102).
