Don’t believe the forex hype! How To Avoid Excessive Risk.

Awhile back I did a couple of articles on my blog at www.askjeffwilde.com about how system performance results can be highly misleading due to the system being over-optimized by it’s creator.

I want to bring to light another way that your being mislead when it comes to the reported performance numbers some systems brag about.

When you see systems that show 100% or more gains per month odds are its part truth and part fiction, let me explain…

Say the system your considering buying started with $1000 in the account and due to the high amount of leverage the brokerage provides, it trades a full standard lot of $100,000.

Now say it grabs a great trade off the bat of 50 pips.  That means it made $500 and the account balance is now at $1500.  So far so good!!!  Now the system gets more aggressive and on the next trade, buys 1.5 lots.  Now on this trade it didn’t do quite as well but it stlll made 20 pips.  Well this adds $300 and the new account balance of $1800.  On the last trade it gets even more aggressive and buys 2 full lots.  This time it only make 10 pips but…  It nets another $200 bringing the tally up to $2000.

On the surface this seems like what you’ve been dreaming about as the account doubled in just 3 trades and… It has you salivating and planning an early retirement as you start doing the math of doubling your account over and over and over…

So while the above scenario is true, what you’ll never know is the extremely aggressive risk the system took to achieve these results. AND… The thing you must remember is that leverage in forex trading is a very sharp and dangerous double edged sword.

For example…

Say instead of 3 winners in a row the system started off with a loss of 25 pips and then 15 pips.  Well now the account is down $400 or 40%. This is a number that few traders could stomach or willing to put up with!

So… In my experience the only system performance numbers that reflect sane and practical risk levels are based on no more that 2% risk on a trade. I know you’ve been taught that but…  When you see these triple digit gains over a short period of time there is no way they did them risking just 2%.

You’ve probably heard this as well…

The true secret to success and longevity in forex is to keep your risk small and preserve your capital at all costs.

I know that doesn’t sound very exciting or sexy but slow predictable low risk gains trump an aggressive roller coaster ride anyday!

Just some food for thought…

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