Dear FX Top Gun,
When I was a boy, we did some fairly brain-dead things. For example, a favorite pastime was wreaking havoc on ant colonies. All you need is a fairly decent magnifying glass and a bright, sunny day… and flash! instant ant colony mayhem! But the joys of watching poor little ants ignite under that magnifying glass weren’t so funny when your buddy turned the glass onto the back of your neck for a few seconds. The searing pain was intense and the burn could be ugly. On the other hand, a boy scout, equipped with a handy magnifying glass could whip up a fire faster than any of the flint and steel or bow and drill teams… on a sunny day that is. In Forex, the nature of the market gives you a very powerful magnifying glass. But just like the one we used as kids, you’ve got to use it right to make it useful and entertaining. Using it the wrong way can be VERY, VERY painful. What is this powerful magnifying glass? &nbs p; Leverage Unfortunately, most amateur traders don’t fully understand leverage and what it can do on the downside… until they blow out their account. It is important that you remember that anytime you are using leverage, the possibility of gaining AND losing are magnified. Let Me Give You A Quick Lesson On The Power Of Leverage… The standard leverage used in Forex is 1% or 100:1, although it can be as high as 400:1 (I don’t recommend using 400:1 leverage). What this means is that to control 1 standard lot ($100,000) a deposit of only $1,000 (1% of $100,000) is required. In Forex, a pip is the minimum move and is worth $10 per standard lot for the EUR/USD, which we will use for illustration purposes. Let’s say you open an account with $10,000 and you go long 1 standard lot on the EUR/USD (which is $100,000 or 10 times the amount you have on deposit). The trade goes in your favor by 100 pips and you gain 100 x $10 = $1,000 or a 10% gain. 10% is a great return and made possible by our magnifying glass. If you were not using leverage and had to deposit the full amount of the standard lot or $100,000, the gain would be only 1% ($1000/$100,000). Now, Here’s The Downside… But, obviously if you lost 100 pips, the total loss would be 10% as well. Make sure you understand how much you can lose on the downside and plan your money management accordingly. In this example, if 10% per trade was too much risk for you, then lower the lot size or lower the amount of pips you are willing to risk. If you put a stop loss at 50 pips, your loss would be 50 x $10 = $500 or 5% of your $10,000 account. A Strategic Application Per my money management strategy (see Secret #13) of finding trades with at least a 2:1 reward/risk ratio, that means your trade would need a potential profit target of 100 pips (double the 50 you’re risking). If that does not look feasible based on your analysis, lower the amount of pips you are willing to risk by dividing it by the potential profit target. So, instead of a 100-pip profit, you analyze that you could get 50 pips of profit. Then your stop loss needs to be at 25 pips, which would be risking 25 x $10 = $250 or 2.5% of your $10,000 account to profit 50 x $10 = $500 or 5% of your $10,000 account. In the end, the power of the magnifying glass can be very useful to you. It can turn ho-hum profits into great profits if it is used in connection with the right strategy. However, if you use it incorrectly or fail to recognize its power, you might just end up like that pile of ants… toast.
Here’s To Your FX Trading Success,  DC Bonta, The world’s #1 FX money manager  ******************************************************************* Editor’s Note: DC Bonta is considered the world’s number one FX money manager based on his legendary wins and unusually high, extremely consistent returns. He shares his exclusive strategies and insights with a select group of traders through a daily training service. To learn more about this revolutionary service, click here now. *******************************************************************
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