When leverage works, it magnifies your gains substantially. I only use pip stop losses. Your true leverage is You place a pip stop loss and it gets triggered. You believe you just had a bad day. You believe the tide will turn so you trade again. Your true leverage is about You set your usual 30 pip stop loss and lose once again! You loosen your stop loss to 50 pips. The trade went against you 37 pips and because you had 3 lots opened, you get a margin call. Your position has been liquidated at market price.
A four trade losing streak is not uncommon. Experienced traders have similar or even longer streaks. The other reason experienced traders succeed is because their accounts are properly capitalized! While learning technical analysis , fundamental analysis , sentiment analysis , building a system , trading psychology are important, we believe the biggest factor on whether you succeed as a forex trader is making sure you capitalize your account sufficiently and trade that capital with smart leverage.
Your chances of becoming successful are greatly reduced below a minimum starting capital. It becomes impossible to mitigate the effects of leverage on too small an account. Low leverage with proper capitalization allows you to realize losses that are very small which not only lets you sleep at night , but allows you to trade another day. The currency pairs that he normally trades moves anywhere from 70 to pips on a daily basis.
In order to protect himself, he uses tight 30 pip stops. Bill feels that 30 pips is reasonable but he underestimates how volatile the market is and finds himself being stopped out frequently. After being stopped out four times, Bill has had enough. He decides to give himself a little more room, handle the swings, and increases his stop to pips.
His leverage is now over He decides to tighten his stops to 50 pips. He tries again with two lots. This time the market goes up 10 pips. He opens another position with two lots. The market drops 50 points and he gets out. The market moves pips pretty darn easy. As a new trader, you should consider limiting your leverage to a maximum of Or to be really safe, Trading with too high a leverage ratio is one of the most common errors made by new forex traders.
Until you become more experienced, we strongly recommend that you trade with a lower ratio. Partner Center Find a Broker. The only limits on human achievement are self-imposed.More...