DEFINING RISK IN FOREX – 3
May 3rd 2010 00:00
Pic Sourse: Wikipedia
How To Lose It All And More.
There is certain information that a novice, who had a bit of experience in the stock market, has to realize if he would like to try the foreign exchange market.
That information has to do with the funds that he would put into his account with his chosen forex brokerage house.
In the stock market, the money in his stock brokerage account which he did not use to buy stocks will be just like the money that he put in a bank account. It will remain intact (untouched – except by inflation) and may even earn some interest.
In Forex, even the money that was not used to buy currencies is at stake. In fact, even the money that was not in his brokerage account would be at risk if the novice is not careful.
For more clarity, let’s say that you deposited $1000.00 in your Forex account. Let’s also say that your brokerage house allows a margin of let’s say 400 (they all give big margins). If the novice is not careful and the market turned against the direction of the currency pairs that he bought, he could potentially loss up to $400,000.00!
That is, if he (and his brokerage house) allowed his losses to accumulate. There are brokerage houses that terminates your account if your losses is about to go beyond your available funds with them. But then, even that already means you’ve lost all your available funds – when in fact you just initially wagered say, $50.00.
This is the reason why anybody who plays the Forex is always given the advice to put a “stop-loss” in place.
Some however refuse to use this feature, especially if their positions are always being stopped out.
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