If You Don’t Have a Philosophy, You Will Lose Money
“Easy Money” is the allure that captives many beginning Forex Traders. Forex websites offer “risk free” trading, “high returns”, “low investment” These claims have a grain of truth in them, but the reality of Forex is a bit more complex.
Mistakes of the Beginning Trader
There are 2 common mistakes that many beginner traders make: trading without a strategy and letting emotions rule their decisions. After openeing a forex account it may be tempting to drive right in and start trading. Watching the movements of EUR/USD for example, you may feel that you are letting an opportunity pass 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 guarenteed to lose money. Forex Traders must have a rational trading strategy and not make trading decisions in the heat of the moment.
Understanding Market Movements
To make rational trading decisions, the Forex Trader must be well educated in market movemaents. He must be able to apply techincal studies to charts and lpt out entry and exit points. He must take advantage of the various types of orders to minimize his profits.
The first tep in becoming a successful Fores Trader is to understand the market and the forces behind it. Who trades Forex and why? This will allow you to identify successful trading strategies and use them.
There are 5 major groups of investors who participate in Forex: governments, banks, corporations, investment funds, and traders. Each group has its own objectives, but 1 thing all 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.
Large organizations and educated traders approach the Forex with stragegies, and if you hope to success as a Forex Trader you must follow suit.
Money management is an integral part of any trading strategy. Besides knowing which currencies to trade and how to recognize entry and exit signals, the successful trader has to manage his resources and integrate money management into his trading plan.
There are various strategies for money management. Many rely on the calculation of core equity – your starting balance minus the money used in open positions.
Core Equity and Limited Risk
When entering a position try to limit your 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 $1,000 to $3,000. You do this with a stop loss order 100 pips (1 pip = $10) above or below your entry position.
As your core equity rises of falls, adjust the dollar amount of your risk. With a starting balance of $10,000 and 1 open position, your core equity is $9000. If you wish to add asecond 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.
Greater Profit, Greater Risk
You should also raise your risk level as your core equity rises. After $5,000 profit, your core equity is now $15,000. You could raise your risk to $1,500 per transaction. Alternatively, you could risk more from the profit than from the origanl starting balance. Some traders may risk up to 5% agains threir realized profits ($5,000 on a $100,000 lot) for greater profit potential.
These are the kinds of strategic tactics that allow a beginner to get a foothold on profitable trading in Forex.
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