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One of the biggest challenges new forex traders face is managing their greed. Most new traders are out to make a million dollars overnight and trade far too aggressively, leading only to blown accounts and heartache. If you want to be a successful trader, you need to leave behind the ‘get rich quick’ mindset and focus on slow and steady gains. Slow and steady gains will make you rich over time; trying to get rich overnight will just lead you to the poor house.
In this piece we will discuss some of the greed-pitfalls new traders encounter and how to avoid them.
Choosing the right amount of leverage
Your battle with greed starts well before you actually place a trade, it starts as soon as you open an account and select your desired maximum leverage. Do you really need 500:1? In all honesty, unless you are trading an aggressive scalping system with 2 pip stop losses, you probably don’t. 50:1 is more than adequate for the majority of trading strategies and if you are just starting out, you really shouldn’t set your account leverage beyond here. The thing with leverage, is if it’s available to you, you will be tempted to use it.
New traders should set their account leverage to 50:1 or less and only request their broker raise the leverage if their strategy actually requires it.
Choosing the right account size
One of the biggest mistakes new traders make is depositing too little and attempting to use excessive leverage to multiply the account. If you want to make $1000 a week consistently, then you need to deposit an appropriate amount of money. On the other hand, you shouldn’t deposit your entire life savings when you are just starting out either.
Start out with a small account and look to grow it consistently. Once you are confident in your abilities and want to start making more money from your trading, increase the size of your deposit accordingly. If you were making $100 per week on your $1000 account and you would like to be making $500 per week, then you are going to need a $5000 account to achieve this goal.
Risk no more than 2.5% per trade
Risking too much per trade is a sure-fire way to excessive drawdowns and blown accounts. If you are just starting out, you should never risk more than 2.5% per trade and you should probably only be risking 1% per trade. Assuming you win twice as much as you lose on any given trade, the gains from 1% trades can stack up quite quickly.
Let’s take a look at some hypothetical 1-week results of a trader risking just 1% per trade, trading twice per day and winning 50% of their trades:
- Risk Per Trade = 1%
- Total Trades = 10
- Losing Trades = 5 (-5%)
- Winning Trades = 5 (+10%)
- Net Result = +5%
5% per week may not sound like much, but multiply that over the entire year, factoring in compounding, and you’d be surprised at just how quickly those gains add up. 5% per week over 52 weeks, including compounding, results in an annual return exceeding 1200%. That’s a return of $60 000 on an initial investment of $5000, or a return in excess of $100 000 on a 10K account!
Slow and steady wins the race
As demonstrated above, slow and steady gains quickly add up. Forex isn’t a sprint race, it’s a marathon. Sure you could just try and double your account 12 times in 12 trades, but what are your chances of getting every trade correct without blowing your account? If you really want to make it rich trading forex, you need to attach suitable time frames to your profit goals.
Greed will always be there and keeping your greed in check will be a constant battle, but by applying systematic rules to your trading approach, you will make this battle a lot easier. By limiting your available leverage to 50:1, funding your account appropriately and limiting your risk per trade, you will have taken three important steps to ensuring your victory against greed and the markets.
If you really want to be a successful forex trader, you need to be patient. Big things don’t happen overnight. Slow and steady returns will compound over time and produce truly amazing results. On the other hand, short-sighted, greedy trading will nearly always lead to you losing all your money. Which sort of trader do you want to be? A winner or a loser?
