Let’s say a forex market trader has 1,000 lei available to bet on pairs of currencies.
The assumption is that the trader guesses the move of the currency pair. To simplify let’s say they double their money every time they guess the move of the foreign currency pair and lose all their money if they guess wrong.
After a winning bet, they will have RON2,000 in their account. Most of those who win on the forex market become greedy and instead of betting on the same amount every time, as they win more, they bet increasingly more money.
Let’s assume the same forex trader guesses the right trend of the currency pair ten times in a row and bets all their money each time, ending up with an impressive amount of over RON1 million.
If they continue to bet all their money on the forex market, one wrong guess is enough for them to lose all the money, including the original amount bet.
In practice, forex market traders gain or lose around 10-20% of the money in one transaction on average, but the exponential increase in the amount bet remains a fact.
Now lets return to the original situation where the forex speculator has RON1,000 available, but for instance loses half the amount in a first stage, ending up with RON500 in their account.
Because in such cases it is very difficult to recoup your money by betting small amounts on the forex market, intuition tells you to take an excessive risk, which is in fact very dangerous thinking.
The trader will raise the stakes, so they will either double their money or lose it all, not just the original half they had bet on.
The minimum amount that a forex trader is required to bet is EUR100 but with the help of leverage they can in fact trade EUR10,000.
Some currency pairs allow you to trade EUR20,000 for a deposit of EUR100, but if you guess the trend of the currency pair wrong, you lose twice as fast.
Those who lose on the forex market tend to increase the leverage effect, which in fact amounts to higher risks and more often then not traders end up losing all the money.
This behavior is similar to gambling behavior, where the trader places several major bets in the hope of making up for previous losses.
So greed is the biggest obstacle facing forex traders, especially inexperienced ones, causing them to lose money often without realizing it.
(English version by Daniela Stoican)