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Before you read on, Click the link below and join our Trading community for free. In this community you are free to ask us any questions that is trading related.

https://www.facebook.com/groups/tradesnprofits

The group is starting to grow and we are glad to get this started. We are very eager to make this one of the best trading group but before that happens, we have to remind many traders the basics of trading. The reason for this is because we realize many traders “know” how to trade but they just simply forget the basics and start to bust their account within a couple of months.

In many cases, traders are suck in too much by greed that they forget the importance of position sizing. Many traders do not understand the risk they are undertaking expecially when trading on leverage product such as CFD or FX.

Trading on leverage gives you the ability to trade the same exposure on smaller capital, and in many cases with better spread and commissions. However many traders use it the wrong way that they increase their exposure by using the same amount of capital. When this happens, the risk that the trader undertakes automatically multiplies in accordance to the margin that is given.

Example :

Table A

$20 000 Exposure used correctly
Cash Leverage 10X
Counter Price $1 $1
Size 20000 20000
Capital Required $20,000 $2,000
Counter Price Moved $1.50 $1.50
Difference is move $0.50 $0.50
Profit&Loss 10000 10000

Table B

$20 000 Exposure used incorrectly
Cash Leverage 10X
Counter Price $1 $1
Size 20000 200000
Capital Required $20,000 $20,000
Counter Price Moved $1.50 $1.50
Difference is move $0.50 $0.50
Profit&Loss 10000 100000

If you see the example on Table B, because of over sizing and maximizing the capital on account, the trader is actually having a total exposure of $200000 instead of $20000.

So in a nutshell, traders please remember to do proper position sizing and stick to the amount of risk that you have allocated. Over trading, is one of the fastest way a trader can bust their account.

 

 

 

 

Author: Trades&Profits

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