May 18, 2009

Running A High Risk High Reward Forex Account

In this post I want to discuss the merits of opening a forex account specifically to place high risk high reward positions. Now before you dismiss this idea out of hand, please hear me out because this concept may not be as crazy as it sounds.

What I'm actually suggesting is that you open two forex accounts. The primary one should be used to trade your main forex strategy and should hopefully accumulate regular profits over time as a result of taking controlled positions. You should treat this account like you would your pension fund in that your ultimate goal is to grow your account by taking safe low-risk trades which over time will give you some very healthy returns.

The secondary one should be your high risk account. This account should be a fraction of the size of your main trading account, and should be financed by money you can afford to lose. The goal of this account is to identify set-ups that have a large pay-off of at least 4:1. For example you are looking to trade positions which could potentially move 400 points in your favour whilst using a 100 point stop loss.

Furthermore you will be risking your whole account on this trade, or as much as you are allowed by using leverage. The worst case scenario is that you lose all or most of the cash in your account but remember that this account should be very small anyway and it should be money you can afford to lose. I usually start off with no more than £200 in this high-risk account.

With this account I am looking to make at least £800 from a winning trade and while this may sound fanciful, it is not actually that difficult because you only need a success rate of 20% (equivalent to 1 winning trade out of 5) just to break-even. However if you get a couple of consecutive winning trades, your account can grow substantially.

Although this is a high-risk account, you should still take this account seriously. Use technical analysis along with support and resistance lines to place the odds in your favour and only trade those positions that are most likely to pay off. For this particular system I suggest you use some kind of breakout system on the daily or weekly charts because these time frames are the ones that will give you these substantial gains.

If you get it right with an account size of say £200, you could grow this into £1000 with one winning trade, and then you can either withdraw your winnings and start again, withdraw the initial £200 and look for another opportunity with the remaining £800, or you could look for an opportunity to turn the £1000 into £5000 (I actually achieved this feat a couple of years ago). If you lose with the initial trade, you have only lost £200 and can simply reload your account if you have any spare cash that you can afford to lose.

This strategy of having two types of account isn't for everyone of course, but as long as you have a primary low-risk account which contains the majority of your trading capital, then I don't think there's anything wrong with risking a tiny fraction of this capital in a high-risk account because you can make some substantial gains if you catch some of the sizeable moves that occur regularly on the daily or weekly charts.

 

 

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