In Part 3 of our Forex Proper Money Management series, i would like to present to you Tom. This is a story of how short lived his forex trading account is due to poor money management. This is a story of a forex margin call that plagues many forex traders, especially beginners.
Having deposited $200 for a forex trading micro account, Tom was all ready to go and was feeling on top of the world. He heard his friends saying that forex is a trending market. Just follow the trend and wait for the profits to roll in! Due to his complacency, Tom did not spend time to learn about forex trading. In fact, he felt that the best way to learn forex trading step by step is to do the actual trade itself!
A New Forex Trader’s Mistake
It was Friday 07 AUG 09. 0820HRS. He heard people commenting about the US Non Farm Payroll and how much movement is generated usually during such an economic event. “Good!” He thought. As long as he caught the trend, he would be earning big bucks. How difficult could it be to identify if a chart was going up or down.
He opened his forex chart and saw this.
His friends had advised him that forex is fast moving and hence he decided on the 1 minute forex chart so as to catch all the movement as it happened. His conclusion was that he was right all along about forex trading charts, simple and straightforward. It was trending up.
He entered a long position @ $1 per pip for the EUR/USD at 1.4373.
Pausing for a moment to consider if he should set his stop loss and take profit values, he concluded that it was unnecessary since he would be monitoring the currency trade in real time.
It was 0830HRS. He screamed with joy seeing how the price action had developed in his favor on the forex chart. The price was at 1.4401 and he was earning $26 dollars after the forex brokers’ spread. This reinforced his thinking that forex trading was easy and that the trend was definitely up. Therefore, he entered another long position @ 1.4401 and $1 per pip. That night was his lucky night he thought.
Forex Trading Gets Real
A few minutes later, his forex trading world had been turned upside down. Both of his long positions had turned into losses, amounting to about -$86. Tom started to regret his decision to skip on the stop loss and take profit values, essentially trading without a forex plan.
Panic sets in and Tom tried to close the forex positions. However the price movement was too fast and he was constantly getting an error message of “reqoute” which he did not understand.
He finally exited at 1.4345 and with around $114 left, he consoled himself that all was not lost. He would simply ride on the down side momentum now. Tom tried hard to enter a position to short the EUR/USD but the trading platform was constantly showing “reqoute”.
Is Forex Trading Profitable?
Dear readers we may laugh at this story but recklessness do gets the better of us at times. Tom was unfortunate enough to choose the US NFP as his first step into forex trading. His attitude towards proper money management being just a fanciful term for nerds compounded the disaster.
We have discussed previously about why it is important to have a proper forex trading plan and proper money management to achieve success in forex trading. Forex trading can be profitable if you are willing to invest the time and effort to learn proper forex trading techniques and approaches.
Unfortunately, incidents like Tom’s are very common in the forex trading market.
He made the mistake of
- Having a position too big for his capital
- Having no stop loss / take profit to manage his risk
- Trading without getting the background on the current market conditions ( The US Non Farm Payroll was due )
In summary he had no proper money management and no clue about the forex market’s undertones.
Tom is everything we strive not to be.
A Forex Trading Account’s Premature Closure
It was 0908hrs and Tom was sitting at his computer hands folded. He was gaining when he managed to short at around 1.4300 and he had entered another short at 1.4280. However the price action reversed again, sweeping off his short positions. He had suffered a forex margin call and had less than $50 dollars in his account. With a leverage of 1:200, he would not be able to enter a position of $1 per pip anymore. Within a mere half hour, he had lost more than half his account. Feeling frustrated, he decided to close his forex trading account.
Forex trading is never easy and we definitely need to put in our efforts to learn the right ways. In fact, forex trading is a constant learning journey as market undertones may shift over time. Trade safely and do not learn proper money management the hard way like how Tom did.