Many traders come with false expectations of the profit potential and lack the discipline required for trading. Day trading or even short term position trading can prove to be very difficult for amateurs due to the extensive leverage offered by the FX market. Just like any other market instrument, the rules of finance and logic apply. In other words, one cannot hope to make extraordinary gains without taking extraordinary risks. A strategy that incorporates high degrees of risk should be expected to result in inconsistent performances and even large losses. Trading isn’t easy. If it were, I wouldn’t work 12 hours per day. Even traders with several years of experience, and are considered to be successful, have extensive “losing streaks”. Like any other valued skill, trading takes time to master and there are absolutely no short cuts.
The most alluring aspect of forex is the high degree of leverage offered. The idea of having the ability to turn small amounts of money into much larger amounts in minutes is extremely tempting.
However, leverage is a double-edged sword in that it can provide exciting profit potential, but traders must understand that the potential losses are also great. The biggest mistake that inexperienced traders make is over margining their account.
For example, if the margin on a currency pair is $1,000 and you have $10,000 in your trading account, this doesn’t mean that you should execute 10 positions. In fact, trading one lot, rather than multiple lots, will likely increase your odds of success.
Traders that over leverage their accounts are often “forced out” of losing positions prematurely that would have ultimately become profitable. Successful traders know that it is much easier to “outlast” the market than it is to “out trade” it.
Most experienced traders will agree that as a rule of thumb you should never use more than 50% of your available margin, and believe it or not many professional money managers are not authorized to leverage a trading account over 10%.