The majority of forex traders lose money because they over-leverage their accounts. So I want to answer this common question in this article, “How much money should you risk on a single forex trade?”
But before we get to this question, I want to discuss leverage for just a second. Leverage is what allows everyday people like you and me to trade in the currency markets. With leverage, you can control a large amount of money with just a small portion of that money being yours.
Here’s an example: let’s say you want to buy $500 of stock. To buy $500 of stock, you must invest at least $250 of your money. The other $250 you can borrow (or leverage) from your stock broker. This means you control $500 of stock with only $250. This is an example of 2:1 – you control twice as much as you invested.
The leverage ratio is much higher in the forex. Most fx beginners begin trading with 100:1 leverage. 100:1 means that you control 100 times the amount of currency that you can buy with your own money.
This large amount of leverage is needed because the small movement in currencies (sometimes just a penny a day) wouldn’t be worth trading without being able to buy large amounts. Without this leverage, even an investment of $1,000 wouldn’t give you any returns worth talking about.
This high leverage allows us to trade in a market that wasn’t intended for us – it was intended for banks and large corporations. This high leverage allows us to make 5%, 10%, or even more in just a few hours of trading. This is one of the reasons that the forex is so popular!
But this high profit potential can be expensive – literally! If you can make a whole lot of money in just a few minutes, you can certainly lose it as well. Just a few over-leveraged losing trades can completely wipe out the account of a beginning trader.
So now let’s talk about the question we started with – how much should you risk on a single trade?
I suggest never, ever risking more than 3% of your trading account on a trade. This means that if your trade hit your stop loss, your trading account would not fall more than 3%. Some traders like to risk more, some traders like to risk less. Either way you choose, you must not over-leverage your trading account!
Comments are closed.