Blowing up a forex account is a relatively easy thing to do. Indeed, statistics by most online forex brokers show that more than 85% of people who open trading accounts with them lose money. In this article, we will look at some of the key tips on how you can avoid blowing your forex account.
Reduce your leverage
Leverage is a common feature offered by most online forex brokers. It refers to a “loan” that these brokers offer their traders in order to maximize their trading results. This leverage can range from as little as 1:10 to as high as 1:2000.
Leverage works like this. Assume that you have a $1,000 account, and you opt for a 1:30 leverage. It means that you can open trades worth $30,000. As such, if your trades go well, you can make more money than when you did not use this leverage. Therefore, it is relatively easy to see why most forex traders opt for using leverage.
While leverage is a good thing, it is a double-edged sword. If it can make you more money when things are going well, it means that it will hurt you substantially when things are not doing well.
Therefore, I recommend that you choose your leverage wisely. If you are a new trader, you should start with small leverage and then grow it as you gain more experience.
Fortunately, some regulators are taking the issue of leverage seriously. In the European Union, the MIFID regulations mandated that the maximum amount of leverage that brokers can offer is 1:30. The same regulations have been implemented in Australia.
Stop loss and trailing stop loss
The forex market is known for its volatility. Besides, it is the most liquid market in the world, with daily volumes of more than $5 trillion. The market also operates on a 24-hour basis. Therefore, you should always seek to protect your trades.
Fortunately, forex brokers offer several tools to help you protect your trades. First, they offer you a take-profit, which is a tool that automatically stops your trade when your profit target is reached. Second, they have a stop-loss, which is a tool that stops your trades when trade declines to a certain level.
Most importantly, they offer a tool that is known as a trailing stop-loss. This tool is a modified version of a stop-loss. The main difference is that, instead of being static, the tool moves with the trade. As such, it helps you capture profits early on.
For example, assume that you placed a buy trade at 0.9000 and you added a stop-loss at 0.8000. In this case, if the trade moves to 0.9080 and then drops to 0.800, you will have lost money.
If you had a trailing stop-loss, the initial profits you made would be captured. Therefore, we recommend that you embrace the role of stop-loss and a trailing stop.
Lot sizes
The size of your trades can help you to avoid blowing your trading accounts. The idea behind this is relatively simple. If you open a substantial trade, it means that you will be in a good position to make more money. For example, if you bought a EURUSD pair with a volume of 2, you will make more money than someone who opened the trade with a lot size of 1.
As with leverage, the size of the trade is a double-edged sword. While a bigger lot size will make you more money, the opposite is also true when things don’t go your way. Indeed, I have seen more people blow their forex accounts simply because they used too big position sizes.
Therefore, you should ensure that you are not opening supersize trades. Doing this will mean that you won’t make a lot of money. However, it also means that you will not lose a lot of money per trade. Besides, when you add up those small profits that you make, they will add up to something great.
As you start your trading career, ensure that you are using a small lot size and see your account grow. Besides, you will not feel all that bad whenever you lose money.
Avoid overtrading
Another simple way that will help you avoid blowing your forex account is known as overtrading. This is the process where you decide to open tens of trades per day.
To be clear. Many experienced traders have made a fortune by opening hundreds of trades per day. However, if you are a new trader, we recommend that you avoid opening so many trades per day. This is because you increase your chances of losing money whenever you open a trade.
Instead, we recommend that you embrace a trading strategy that includes opening a few trades per day. The amount of money you will lose when doing this will be relatively small. In line with this, you should always avoid leaving your trades open overnight unless you are a swing trader.
Avoid Martingale approach
The Martingale approach has been embraced by traders who have some experience in gambling. The strategy is relatively simple to understand. It states that if you lose money in a trade, you should open a similar trade but with a bigger lot size. If you lose that trade, you should also open another bigger trade.
The idea behind this is simple. If you open several trades, there is a likelihood that you will make bigger profits that will compensate for the previous losses.
However, in reality, the Martingale trading strategy is one of the riskiest approaches to trade forex. It is also one of the easiest ways of losing money since you are simply gambling. Therefore, we recommend that you avoid this method.
Summary
It is easier to lose money in the forex market than to make it. This is why thousands of traders blow up their accounts on a daily basis. In this article, we have looked at some of the popular ways you can use to prevent blowing up your account. Others include doing the research before you open a trade and always using a trading journal.
