Yes, Forex trading can make you deeply in debt unless you take appropriate precautions. Here are some scenarios that can make you indebted from trading and faster than you can imagine.
Obtain a loan to invest in trading
One of the basic rules in the world of trading and investment is to avoid financing your deals by borrowing. This means that it is necessary to look for other ways to fund the trading account instead of borrowing money with the intention of repaying the loan from the trading profits.
The rationale behind this rule is very simple, and that trading in the Forex market carries great risks, and even the successful traders are no exception to that rule, as they are also exposed and often in a series of successive losses. Trading with borrowed money will put you under enormous pressure as you will feel compelled to repay your loan to the creditor at a specific time.
This means that you will fall into the trap of over-trading to “force the market” to give you some profits, and that catastrophic mindset will prompt you to make wrong decisions that often end in heavy losses. Moreover, markets often move within cross-ranges without any clear trends, which means that you may have to close some good deals on a loss because you need to get money quickly to pay off your loans.
Accordingly, we advise you to avoid borrowing any money to finance your trading activities in the Forex market, so that you do not end up drenched in debts that you are unable to pay.
Excessive use of leverage
Most Forex brokers provide leverage to their clients, which allows them to open trading positions greater than the balance available in their accounts, which is similar to what is called margin trading in stock markets.
The main advantage of leverage is that it helps you to increase your profit opportunities by more than what your personal funds available in the trading account. Nevertheless, do not forget that leverage is a double-edged sword as it can also multiply your losses, and even result in the zeroing of your account, if your deals are losing.
These risks have prompted financial regulatory and regulatory bodies such as the UK’s Financial Conduct Supervision Authority (FCA) to apply restrictions on the maximum permissible leverage for individual traders, not to exceed 1:50. Nevertheless, so-called “professional traders” can negotiate with their broker to obtain higher levels of leverage.
Ignore sound rules of risk management (Greed)
Feeling of greed is one of the most common reasons for Forex traders to fail, as greed usually causes them to destroy their accounts and fall into the debt trap. For example, many greedy traders ignore the golden rule that recommends not risking more than 1-2% of the account balance in a single trade.
Applying rule means that zeroing your account will require at least more than 50 losing trades. Nevertheless, most Forex traders ignore this simple rule and risk more than this ratio in a single trade, which of course eliminates the account after a few losing deals.
Another risk resulting from the lack of proper application of risk management rules is exposure to heavy losses in the event of unforeseen events that lead to sudden and sharp movements in the currency markets, such as instantaneous or mini collapses, which will make you mired in debt if you risk more than 1-2 % Of your account balance in each trade.
Experienced traders realize the importance of moving away from the market when they are in an unstable mood, because irritable moods will often lead to serious mistakes that can be avoided when your mind is clear.
This means that you must assess your current mood before starting trading, and it is advisable to cancel all trading plans if you have some feelings outside your control once you start trading.
For example, it is not desirable to practice trading if you feel sad or after engaging in an intense quarrel with your wife or friend, because your emotional state in this case will not be fine, which may cause you to make some naive mistakes.
You should also take a break from trading if you encounter a continuous series of successive gains or losses, in order to restore your mental balance and get rid of the emotional impact of previous trading results. For example, if you are lucky and have made a series of successful deals without interruption, this will make you feel arrogant, while successive losses will weaken your confidence and feel the desire to take revenge on the market, and both scenarios often lead to catastrophic failure.