Let me start with the following quote from Norm Franz.
If everyone would be trading with his own money we would not be in this economical global mess we are currently assisting. Trading on margin accounts is trading on borrowed money, and if you borrow more then you can repay, sooner or later you will default and face some troubles ending worse then you initially started. Happens the same in trading.
If I would take 2.000$ (dollars) and go to an exchange house and exchange them for € (euros), considering the current rate after fees at 1.11, I would go home with approximately 1.800€. That money would be mine and no matter what happened in Europe I would still own 1.800€ with me. I could of course get less $ (dollars) back if the euro depreciated, but I can hold that money for as long as I see fit.
Banks make money borrowing money with interests and broker do the same to the traders. Margin accounts and leverage look amazing at the first glance with the opportunity to make a lot of profits quick and fast.
This illusion and our NEED for consumption to buy all our WANTS (http://bit.ly/50-30-20home_budgeting_rule) cloud our matematical/statistical and logic skills. We skip all steps and start right away borrowing a lot of money from the broker for that big fast cash dream.
Now many simply forget about past historical data, facts and that history once was real life and it tends to repeat itself quite often.
Volatility is a constant in trading with days and years more volatile then others, but a low volatile year measured in average can have the widest standard deviations and daily moves. Eur/usd can climb or fall 3% in one two days and it happen more often than you can expect.
Let’s follow our example of owning a 2.000$ account and we open a 0.60lot buy position on eur/usd at 1.11. Many don’t have a clue about how much money they are borrowing from the broker. If 1 full lot is 100.000units, then a 0.60lot are 60.000units. If you are buying 60.000units of € (euros) at the exchange rate of 1.11, this means you are using 60.000 x 1.11 = 66.600$
If your account has only 2.000$, then you are borrowing 64.600$ from the broker. Now let’s imagine one of those days happen where eur/usd falls 3% due to some fundamental event and the exchange rate falls to 1.0770. Your 60.000units you borrowed are now worth 60.000 x 1.0760 = 64.560$
You invested a total of 66.600$ and had only 2.000$ in your account as a guarantee that you are able to borrow money from the broker (you even agreed to the terms and disclaimers that CFD trading carries risk etc..bla bla..yeah, you only remember to check this part after the losses), but now you are at 64.560$, that is a loss of 2.040$. The broker of course sets a minimum threshold and has the trading platform automated to close any positions if you run out of margin to cover all your borrowed amount and would have sold your position getting back the borrowed money and taking your 2k as a loss for that transaction.
If you want to get rich quick, grow your business, increase your sales.
Forex is about risk management and Investing as much as you can handle.
And of course repeat this process over and over again. :)
Overtrading is exactly the same as borrowing money you don’t have or can’t handle to repay. Stay safe, shift to lower risk and improve your skills and then master the art of borrowing as much as you can handle. Avoid the emotional rollercoaster attached to it.
Wish you all a great week,
Join Facebook group http://bit.ly/FBCLHedgeFundGroup and don’t miss any updates.