Forex: Free Margin Is Everything

I recently had a young lady purchase my system (www.fxpowerhedge.com), and she blew up a whole $50,000 demo account in two days. When she contacted me for support, it took me about half a second to ask her how many trades she made at the start and how much free margin she had allowed herself.

Her response? I quote, "What's free margin?" It was okay. I explained. It's not unusual for novice traders to buy my system and start out with actually zero knowledge about trading forex. So I explained to her the importance of free margin. Somewhere along the way in that series of e-mail exchanges, I realized that I probably haven't emphasized free margin requirements enough in my blog and in other communications.

Then, if you really stop to think about it, you realize that free margin is EVERYTHING in forex. It "can" be the sole determining factor between profits and losses (unless you happen to pick ONLY winning trades, which is tough since even my system has a 3% losing statistic). And while my system has been documented to be the most statistically successful in forex (no surprise since it is based purely on mathematics and the only 100% true real time data you get in forex), you can STILL face the need to ride out retraces.

If you don't leave yourself adequate free margin, boom -- you're out. You get a margin call and you lose your trade -- typically losing money that seriously hurts your account.

So before you get trade happy after purchasing my system or getting into forex with ANY approach (including flipping a coin, which I've discussed in other posts as being equally viable to technical analysis at its best), you MUST adhere to basic rules of free margin.

Step one here is to talk with your broker and find out their requirements. As the global economy has gotten more and more unstable, brokers have changed their free margin requirements. This simply means they require you to have MORE money available in your account and NOT tied up in trades than previously when we had a stable global economy. So get the exact information you need from your broker.

As a general rule, however, I always recommend at least 50% of your total account equity should be kept available as free margin. With smaller account, you may need to keep MORE equity available as free margin. Let's face it. If you have just a $300 account, then $150 in free margin may not protect you from much in the way of a small retrace.

This brings up the second issue: starting accounts with very small amounts of money. Not everyone has $5000 - $15,000 to open their initial account. I understand. That's real world. Not a problem, and I was there myself in 2006. I lost several $300 accounts in rapid fashion before I started figuring out the mathematics of my system and quickly tossing technical analysis out the window. It didn't take me long to realize you can't predict the future based on past data, and that's EXACTLY what technical analysis attempts to do. So trying to make money with technical analysis when I started out with my own $300 accounts was a total failure (for me).

It's impossible to predict the future in our known universe, and you surely can't expect PAST chart patterns to consistently repeat themselves. So I strongly urge you to forget technical analysis. But you CAN make big profits starting with just a $300 account. It simply requires some patience and intelligent execution of the FX Power Hedge in the early days. As I've discussed before as well, profit in forex grow exponentially, not incrementally. So it doesn't take long to build a small account into a much more safe large account. You simply have to avoid unwise mistakes.

I routinely share charts with my new traders where I demonstrate that it takes (on average) 10 to 14 days to double a $300 - $500 account. However, once you reach the $1000 account size (which yes, can take two weeks or so in today's market), you can then pretty routinely double that account in about 3 days. That's the best example of how growth is exponential in forex versus incremental. And that's the reason we have so many people who have gone from $300 to $500 as their opening account up to $15,000 in only 45 days on average. After that point, you "should" be clearing $1600 - $4000 per 24 hour cycle with my system.

THE WHOLE TIME: FREE MARGIN IS AN ESSENTIAL VARIABLE! You MUST keep at least half your account available as free margin right up through the $15,000 equity level. Only at that point can you start thinking about reducing the amount you keep as free margin to $5000 or so, and even then I err on the side of caution versus pushing the limit. Personally, I ALWAYS keep a minimum of 50% of my account available as free margin even on accounts bigger than $15,000! Believe it.

There's simply too much money on the line to take any risk of suffering a margin call. So it's one thing to get into forex with a system that pretty consistently identifies trends for small and big profits (yes, the profits vary one trade to another). It's something else to identify the trend, but then SCREW IT UP because you made too many trades and left yourself vulnerable to a margin call with even just a small retrace!

Whether you're using my system or technical analysis or whatever approach in forex, WATCH THE FREE MARGIN!!!! It's critical to your success. If you're greedy and you try to make every possible trade to build up profits fast, fast, fast, you can expect problems, problems, problems.

Forex requires patience and good judgment. Forex requires diligence and practice. Forex requires you to take intelligent risks -- not just guess and hope to get lucky. I know it's tempting to look at the declining value of the USD (for example) and just go all-in against the dollar, but that's simply not always going to work. Even the strongest of trends suffers from retraces. But okay, if you had $100,000 in free margin, and you were only trading one lot (which would be pretty ridiculous, but just as an example). That's a trade you could just leave in place and work off the Daily, Weekly and Monthly charts. Retraces, even reverses, aren't going to hurt THAT trade. I know that's an extreme example, but I want to stress that FREE MARGIN allows you to ride out all kinds of mistakes and market fluctuations. So it's a HUGE factor that doesn't get enough attention -- from me and everyone else teaching forex.

So protect your account with enough free margin to safely survive retraces. With a $300 account, I recommend at least $150 as free margin. That's the minimum.

Be smart in your trend identification methodology, and I obviously recommend my own FX Power Hedge system (www.fxpowerhedge.com). I'm going write another post soon about the core concepts of my system relative to the Six Degrees of Freedom in navigation as used by NASA. It's fascinating, and I'm working on what is, in essence, a white paper on charting the course of a currency in terms of price movement to explain why my system works from yet another point of view. So that's coming soon. Meanwhile, be safe. Make every trade count. Win big. Lose small. And NEVER have a margin call! Watch your FREE MARGIN!!!