Yes, forex trading can leave you in debt unless you take the right precautions. Below are some of the scenarios that could get you into trading debt and faster than you can imagine.
Get a loan to invest in trading
One of the basic rules in the world of trading and investing is to avoid financing your trades with leverage. This means that you should look for other ways to fund your trading account instead of borrowing money with the intention of repaying the loan from your trading profits.
The logic behind this rule is very simple, that trading in the forex market involves a lot of risks, and even profitable traders are no exception to this rule, as they too often experience a series of consecutive losses. Trading with borrowed money will put you under tremendous 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 overtrading to 'force the market' to give you some profits, and that is a disastrous mindset that will lead you to make wrong decisions that often end in huge losses. Moreover, the markets often move within ranges without any clear trends, which means that you may have to close some good trades at a loss because you need to get the funds 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 with debts that you cannot pay.
Excessive use of leverage
Most forex brokers provide leverage to their clients, which allows them to open positions greater than the balance available in their account, which is similar to what is called margin trading in the stock markets.
The main advantage of leverage is that it helps you to increase the chances of profit by more than your personal funds available in the trading account. However, do not forget that leverage is a double-edged sword as it can also multiply your losses, and even lead to zeroing your account, if your trades are losing trades.
These risks have led financial regulators such as the UK's Financial Conduct Authority (FCA) to apply restrictions on the maximum leverage allowed for individual traders, not to exceed 1:50. However, so called "professional traders" can negotiate with their broker for higher levels of leverage.
Ignoring sound rules for managing risk (greed)
One of the most common reasons why forex traders fail, greed often leads them to ruin their accounts and fall into a debt trap. For example, many greedy traders ignore the golden rule that recommends not risking more than 1-2% of the account balance on a single trade.
Applying this rule means that zeroing your account will need at least more than 50 losing trades. However, most forex traders ignore this simple rule and risk more than this percentage per trade, which naturally kills the account after a few losing trades.
Another risk arising from the lack of proper application of risk management rules is the exposure to huge losses in the event of unforeseen events that lead to sharp and sudden movements in the currency markets, such as instant or mini-collapses, which will make you overwhelmed with debt if you risk more than 1-2 % of your account balance on each trade.
emotional trading
Seasoned traders understand the importance of staying away from the market when they are in an unsettled mood, because irritability will often lead to major mistakes that can be avoided when your mind is clear.
This means that you should assess your current mood before you start trading, and it is even advisable to cancel all trading plans if you feel some emotions out of your control once you start trading.
For example, it is undesirable to practice trading if you feel sad or after entering into an intense quarrel with your wife or friend, because your emotional state in this case will not be well, which may lead to some naive mistakes.
You should also take a break from trading in case you experience a continuum of consecutive gains or losses, so that you can regain your mental balance and release the emotional impact of previous trading results. For example, if you are lucky and achieve a series of successful trades without interruption, this will make you feel arrogant, while incurring consecutive losses will weaken your confidence and the desire to take revenge on the market, both scenarios often lead to a fiasco.