One of the biggest mistakes for new struggling traders is having the idea that Forex is going to make them rich in the next few weeks. I don't blame them entirely for this way of thinking, because many of those ideas are disseminated to them every single day via internet system marketers. The truth of the matter is that Forex, or any other market, will not make you rich over night... although it can put you into the poor house rather quickly. One needs to understand the inner workings of proper leveraging to truly grasp why this happens to be the case.
When we first fire up our demos, we are excited and salivating from the visions in our minds of cruising around in our new BMWs. We push a few buttons, and we're hooked. I can recall my first experience on a Forex demo. I put on a few trades in the first half hour and made a whopping $300 profit. Not too shabby, I thought. I left a trade open and closed the platform to go about my usual business. By next morning, as I was opening the trading platform I was in awe of what my eyes were seeing - a whopping $1,700 profit on a $2000 initial balance within 24 hours. That's when I realized that this was going to be like taking candy from a baby. Of course, we all know what happened shortly there after. I opened up a live account and lost all my money within the same 24 hour period. So what exactly happened? Here's what happened: I got lucky (on the demo that is).
Let's look at my example to figure out what happens to many traders that are lacking a robust comprehension of how leverage really works. As you may have guessed, I was using standard 100K lots on my demo account. So my first $300 profit was worth approximately 30 pips (acquired purely from luck). Leaving the open trade overnight yielded an additional 170 pips or $1,700 (again, pure luck). The problem here is that on an initial $2000 balance my sizing was overly aggressive. Granted, I didn't know the difference at the time. So when it came time to open up a live account I simply continued with the same formula. However, luck was no longer on my side and as I lost my first trade worth about $500 (or 50 pips), I began worry. Like all new traders I panicked and tried to claw my way out of the initial loss by placing orders on everything that moved. Long story short - 24 hours later I was out $2000 worth of "real money".
Bottom line, a trader must learn to understand how leverage works. I was trading at 100:1 leverage - in other words "pure suicide". What this means is that I was borrowing $100 worth of credit from my broker for every $1 I had in the account. It's great when you win, but an account killer when you lose, as I later found out with my real account. These days I trade with a standard 1 to 1 leverage ratio. In other words, I don't borrow... unless I have to. When I do up the leverage it typically does not exceed 10 to 1. Anything beyond 10:1 leverage and I start feeling a bit uncomfortable. Of course, if I were using 1:1 leverage on my demo I would have only yielded a $20 return, instead of a $2000 return. Not as exciting, I understand. However, I would have also had $1,980 left in my real account instead of blowing it all out in a 24 hour period. The choice is yours.