"Easy money" is the allure that captivates 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 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 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 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? This will allow you to identify successful trading strategies and
use them. Accountability
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 strategies, and if you hope to succeed as a Forex trader you must
follow suit. Money Management
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 or 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 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. 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 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. These are the kinds of strategic tactics that allow a beginner to get a foothold on profitable trading in Forex.
by Ron King
http://www.forex4u-now.com
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