Many Forex strategies focus on entry and exit signals of a trade. This article illustrates how traders can take the same signals, yet arrive at different profit amounts. Therefore, determining an appropriate amount of effective leverage is crucial to a comprehensive Forex trading plan.
Many traders focus all of their energy on finding the right entry and exit signal but still end up losing in the end.
T oday, I want to illustrate how two traders Bob and Ed place the same trading signals in their Forex account, yet end up with different equity amounts. Each tr ade ha s a pip stop loss and a pip profit target.
The traders will lose on the first trade and win on the second trade. When you see the results on a score card, it would look something similar to this: At the surface level, it looks like this trader is doing well. They are maintaining a positive risk to reward ratio, they have a good win ratio , and the number of pi ps collected on this series of two trades are positive 50 pips. Account is set to He thinks he is conservative and implements 40 times effective leverage.
Hypothetical result s for illustrative purposes only. Obviously, the second trade had a much smaller trade size than the first, but when you over-leverage your Forex account, any losing trade damages your capital base to the point where you need to change your trade size or deposit more funds.
He determined the appropriate amount of effective leverage for him was 5 times. Ed placed the same trades as Bob and had the same starting account balance as Bob, but Ed implemented a more conservative amount of leverage. Part of that preparedness is a result of determining an appropriate amount of effective leverage. At DailyFX, we talk about using less than 10 times effective leverage. That way, when you are wrong on a trade, you still have the majority of your account capital remaining.
How to Determine Appropriate Effective Leverage 42 of Risk Reward Ratio Validation. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Swing trading, chart patterns, breakouts, and Elliott wave Connect via: Trade results in pips At the surface level, it looks like this trader is doing well.
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