Big Risk and Big Rewards: Forex Trading

September 21, 2012 by  
Filed under Articles, Currency

If you want to live in life, you’ve got to risk something. Forex trading is all about big risks and big rewards. With a daily turnover in excess of $4 trillion, there’s no other financial market that is as large, or as liquid, as the forex market. Every day, forex traders fire up their trading platform and charting software with the hopes of making money. Before you go down this path, make sure you’ve got solid ground under your feet and are prepared for the roller coaster ride ahead.

Be Willing To Learn

Don’t make the mistake of trying to learn forex “as you go.” There are education systems out there and training courses for a reason. These courses explain the basics, and help you navigate through a maze of rookie mistakes so that you don’t have to lose money unnecessarily. Besides, you’ll have plenty of opportunity to lose money in the FX market once you have your live account up and running.

Be Observant

Forex requires that you develop a heightened sense of observation. You have to be able to spot trends in the marketplace. These trends clue you in to market sentiment. That market sentiment, in turn, tells you how to set your entry and exit positions. Being able to sift through news stories to find relevant bits of facts that might affect the market is key as is being able to recall various rules and rule exceptions during trading.

Develop Discipline

Setting rules for yourself is important. No trader walks into the FX market with a vague idea of what he wants to accomplish. Firm profit targets, stop losses, and various other rules are set in place before a single trade is ever executed. When a trader does open a position, he sticks to those rules and doesn’t become emotional over gains or losses in his account. The discipline is a function of behavior, and while having firm and objective rules helps, it won’t prevent a trader from breaking those rules.

What will keep a trader from acting on his emotions, therefore, is a radical change in his behavior. Cultivate a sense of seriousness when trading and the ability to temporarily suppress your emotions until the trading day is over.

Know Your Limits and Set Rules

Every forex trader has limits. These limits could be trading limits, profit limits, loss limits, or other personal trading rules. Before you start trading, figure on investing just 1 percent of your total savings. This is what most professional traders do. Then, plan on setting both profit limits and loss limits. Profit limits are limits you’ll place on profits for the day. Why do this? Because you don’t want to get too greedy in the marketplace. This leads to emotional investing and “revenge trading” on losses.

Loss limits are exactly what they sound like: a limit on the amount of money you can lose. Loss limits prevent you from backsliding too far. This becomes especially important when you use leverage. Finally, never trade when you’re tired, or you’ve just been through an emotionally tough experience. Knowing your psychological limits may be your greatest strength. Of course, the whole point of knowing your various limits is to ensure that you remain objective and focused during the trading day. That, and some luck, will help you win the day.

 

Stacy Pruitt, a freelance forex strategy and finance writer. Stacy writes about advanced trading and forex indicators. See a video titled “what is forex?”