The dangers of a margin call. A practical example
In Part 3 of the money management series, i will like to present to you Tom.
This is a story of how short lived his forex career is due to poor money management.
This is a story of a margin call.
Having deposited $200 for a micro account, Tom is all ready to go and feeling on top of the world. He heard his friends saying that forex is a trending market. Just follow the trend! It was Friday 07 AUG 09. 0820HRS. He heard people commenting about NFP and how much movement is generated usually during such. "Good!" He thought. As long as he catches the trend, he will be earning big bucks. How difficult is it seeing a chart going up or down. He opens his chart and sees this.
His friends had advised him that forex is fast moving and hence, he decided on the 1 minute chart to catch all the movement. Simple. It is trending up he thought. He entered a long position @ $1 per pip for the EUR/USD at 1.4373. Stop loss or Take profit? He heard about them but felt it was unnecessary since he will be monitoring the trade.
It is now 0830HRS. He is screaming with joy seeing this chart now.
Currently at 1.4401, he is earning $26 dollars after the spread. Hey easy money he thought. The trend was definitely up. He entered another long @ 1.4401 $1 per pip. That night was his lucky night.
A few mere minutes later, the world turned upside down. Both positions had turned into loss. Amounting to about -$86. Why didn't i used a stop loss! He thought to himself. He tried to click on close order but the price movement was too fast and he was constantly getting this error message of "reqoute" which he did not understand. He finally exited at 1.4345. With around $114 left, all was not lost. He tried hard to enter a position to short the EUR/USD as the trading platform was constantly showing reqoute.
Folks, we may laugh at this story but whether we like it or not, recklessness do gets the better of us at times.
Tom was unfortunate enough to choose NFP as his first step into forex. Even more so when he felt that money management is just a fanciful term for nerds. We have discussed previously about why it is important to have a proper plan and money management to survive in the forex world. Incidents like Tom's is very common in the forex 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 background on the current market conditions ( Non Farm Payroll was coming )
In short, no proper money management and insight. Tom is everything we strive not to be.
* * *
It was 0908hrs. Tom was sitting at his computer hands folded. He was gaining when he managed to short at around 1.4300 and had entered another short at 1.4280. The trend was definitely down ! Now, he had suffered a 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 or so, he loss more than half his account.
Frustrated, he decided to close his account.
You can read Part 1 and Part 2 of my money management series.
Trade safe and do not learn money management the hard way like Tom.
Questions and Answers
This article helps you to know more about money management in forex
Effective money management it is widely agreed is the most critical factors in deciding whether or not you are a profitable trader or not. Even that most unsophisticated trading strategies can be profitable given the use of a sound system of money management, here are some tips to get you started on the road to effective money management in Forex trading.
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