Most beginning traders lose all of their money and end up quitting the forex because they over-leveraged their account. The question I want to answer today is, " How much of my money should I risk on one trade?"
Before we dive into the answer, let's review leverage real quick.
Leverage gives us the option to control a lot of money with just a small percentage of that money being ours. When trading stocks, if you want to buy $1,000 of stock, you must invest at least $500. This gives you a leverage of 2:1.
You borrow the other $500 from your broker, and you now control twice as much money as you invested. This is an example of leverage.
The forex offers a lot more leverage than 2:1. Standard leverage in the foreign exchange is 100:1! This means that you control 100 times the amount of money you invested. This large leverage is required because the forex moves in such small increments that you would have to invest millions to make significant money.
Leverage allows normal people like me and you to trade in a market designed for banks, corporations, and governments. High leverage also gives us the ability to make 5%, 10%, or even more in just an hour or two. Is it any wonder that the forex has become so popular?
Naturally, leverage can also cause you to lose 5%, 10%, or even more in just an hour or two. Losing just a few trades in a row when you have over-leveraged your account will wipe out your entire investment.
So let's back to the question - how much should you risk on each trade?
I suggest that you never risk more than 3% on any trade. Some people like to risk more, some people like to risk less. 3% is my standard.
Every once in a while I might leverage 5%, but that is only when I am extremely confident in my trade, and I have had a profitable streak to allow me to risk a bit more. But it is a rare occasion that I would risk 5% more than once or twice a year.
Just be careful out there. Most forex traders quit trading because they run out of money, and they run out of money because they over-leveraged their account. Don't be another casualty.
Learn so much more about the basics of the forex in my latest forex training ebook of more than 35 pages called "The Insider Secrets to Forex Trading for Beginners." Get it right now absolutely free. It gives a lot more detail about this subject and many, many other details profitable traders know.
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