Keen on starting Forex trading? Why would you not be: Many
beginning Forex traders are captivated by the allure of easy money.
Forex websites offer 'risk-free' trading, 'high returns' and 'low
investment' — these claims have a grain of truth in them, but the
reality of Forex is a bit more complex. As with anything in life, what
you put in will determine what you get out.
There are two common mistakes that many beginner traders make
— trading without a strategy and letting emotions rule their decisions.
After opening a Forex account it may be tempting to dive right in and
start trading. Watching the movements of EUR/USD for example, you may
feel that you are letting an opportunity pass you by if you don't enter
the market immediately. You buy and watch the market move against you.
You panic and sell, only to see the market recover.
This kind of undisciplined approach to Forex is guaranteed to
lose you money, and have you waste your time. Forex traders need to
have a rational trading strategy and not allow emotions to rule their
The two emotions prevalent in the above example is greed
(entering the market immediately) and fear (selling when the market
temporarily moves against you). Investing and these two emotions do not
gel at all. Keep them out of your trading and you will see results.
To make rational trading decisions the Forex trader must be
well-educated in market movements. He must be able to apply technical
studies to charts and plot out entry and exit points. He must take
advantage of the various types of orders to minimize his risk and
maximize his profit.
The first step in becoming a successful Forex trader is to
understand the market and the forces behind it. Who trades Forex and
why? Who is successful and why are they successful? This knowledge will
allow you to identify successful trading strategies and use them as
models for your own.
There are 5 major groups of investors who participate in
Forex — Governments, Banks, Corporations, Investment Funds, and
traders. Each group has varying objectives, but the one thing that all
the groups (except traders) have in common is external control. Every
organization has rules and guidelines for trading currencies and can be
held accountable for their trading decisions. Individual traders, on
the other hand, are accountable only to themselves.
If you do not keep yourself in check, nobody else will. Why should they worry if you aimlessly waste your money?
This means that the trader who lacks rules and guidelines is
playing a losing game. Large organizations and educated traders
approach the Forex with strategies, and if you hope to succeed as a
Forex trader you must play by the same rules. That is studying these
strategies and rules before starting to trade is so important.
Forex Trading Philosophy — Money Management
Money management is part and parcel of any trading strategy.
Besides knowing which currencies to trade and recognizing entry and
exit signals, the successful trader has to manage his resources and
integrate money management into his trading plan. Position size,
margin, recent profits and losses, and contingency plans all need to be
considered before entering the market.
This may sound like Greek now! If it does, you have more
reason to get to know these terms. Knowledge will empower you on any
investment market, including Forex.
There are various strategies for approaching money
management. Many of them rely on the calculation of core equity. Core
equity is your starting balance minus the money used in open positions.
If the starting balance is $10,000 and you have $1000 in open positions
your core equity is $9000.
When entering a position try to limit risk to 1% to 3% of
each trade. This means that if you are trading a standard Forex lot of
$100,000 you should limit your risk to $1000 to $3000 — preferably
$1000. You do this by placing a stop loss order 100 pips (when 1 pip =
$10) above or below your entry position.
As your core equity rises or falls you can adjust the dollar
amount of your risk. With a starting balance of $10,000 and one open
position your core equity is $9000. If you wish to add a second open
position, your core equity would fall to $8000 and you should limit
your risk to $900. Risk in a third position should be limited to $800.
By the same principal you can also raise your risk level as
your core equity rises. If you have been trading successfully and made
a $5000 profit, your core equity is now $15,000. You could raise your
risk to $1500 per transaction. Alternatively, you could risk more from
the profit than from the original starting balance. Some traders may
risk up to 5% against their realized profits ($5,000 on a $100,000 lot)
for greater profit potential.
As you can see, the novice needs to get through quite a bit
of education, understanding and planning before those 'risk-free'
trading, 'high returns' and 'low investment' promises will come into
play. What are you waiting for? Get yourself a decent Forex Trading
Education. If you need more information, feel free to visit