edd1, the key to success here is to have some method of tracking your conversions and ROI (Return on Investment). Otherwise you're just guessing, and yes, you are right - it is entirely possible to lose money this way, especially when working within a very narrow margin.
I'd suggest scanning past threads on this Forum for information on the topic of conversion tracking and tracking ROI. It has been discussed, in one way or another, quite often indeed.
In the meantime, I'd suggest only spending what you are comfortable with, and trying to optimize the heck out of your ads so you are paying less per click.
The honest truth is that AdWords does take work, and lots of folks on this Forum have lost money before they started making it. But, believe me, people do make money with AdWords.
Best of success to you.