The 2% Forex rule is one that should be heeded by all who trade with Forex. This rule ensures that you never risk more than 2% of your investment in each trade so that you will never have the risk of losing several years worth of profits made from the Forex market. Whilst setting a 2% limit seems like a same rule, it is one that is often overlooked by many people who make Forex trades, and it is one of the main reasons why people can lose so much money in one go when a trade goes wrong.
When you are planning your Forex trading strategy, you should ensure that you always incorporate this 2% stop loss rule to ensure that your Forex investmentswill remain as safe as possible.
If this rule is such a simple one, then you may be wondering just how traders manage to lose such vast amounts of money. Even the most experienced of traders have fallen into this trap in the past too. The reason is simple. Everyone who enters into the exciting world of Forex always plans on making big money. They always wait for that precious moment when the trade suddenly rises in their favor and they can take the massive profit level that they have always dreamed of. It becomes a kind of addiction, and with that, greed can quickly set in. They alter their stop-loss level to be much lower, believing that the market will quickly recover and they’ll be able to take that dream profit. But such things often never work in the way that one hopes that they might and traders find that they are quickly hemorrhaging money and lose much more than just 2%. When this happens, the trader can find that within minutes, they have lost months or even year’s worth of profits. And all this because they hadn’t followed that one simple rule.
What many people are not aware of is that to regain a loss, it takes a much larger percentage of profit. This is due to the time taken to regain the investment as well as the commission charged by the Forex broker. If you lost 25% of your investment, you’d have to regain 33% just to break even, if you lost 50%, then you’d need a 100% profit, and if you were to really risk it all and lose 90%, then you would be looking at a massive 1000% profit to ever return to the original level of investment that you initially had. These shocking figures highlight the importance of keeping emotions in check in the Forex trading platform and to stick to your trading strategy rigidly.
By now, you’re probably wondering why the rule states that you only risk 2%. Why come up with this figure and not some other? Well if you do the math, it would take an unlucky person to make a loss on their investment 10 times in a row, but if you were so unlucky, you would only have lost 20% of your investment. That leaves you with 80% of your initial investment in tact, which is still not the best position to find yourself in, but if you’d invested 10% in each trade, by this point you would have lost an awful lot more. With any luck, you’ll be able to make a profit every couple of trades or so. Whatever you lose in your stop-losses should be quickly regained by your profits. It is this simple balance that can help you keep hold of your investment when the currency values fall.
At the end of the day, the Forex market is nothing than a very big gamble. You can play it safe, or you can be a risk taker. If you were to walk around a casino, you’d see the people with big money to spend, effortlessly blowing hundreds of dollars at a time, and you’d observe the quieter players making safe bets and taking small winnings now and then. You will probably find that it is the safer players who usually end up walking away with the most money, and this same example can be applied to the Forex market too. You should always play safe and plan for when you lose as well as when you win.