FOREX Trading Philosophy

[abdulla1]

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 trading decisions.

 

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

[winning11]

Very nice article about mistakes newbies usually make. When I was reading the article, I couldn't help thinking of me being a newbie, dictated by my greed and fear, and failed in the forex market. Now I have gained some knowledge and am able to handle my capital well. When I look back, I feel I was so silly as a newbie. I like this sentence "If you do not keep yourself in check, nobody else will." This simply shows me the cruelty of the forex market.

[maxzah]

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[mesbakh]

my philosophy in forex, is " more we trade more we make. greedy means lsoing money

[shoaybkhan]

In today’s financial environment, it is crucial to find alternative ways to increase and safeguard your wealth. We all listen to the news where our politicians and their so called 'economists', who could not even estimate an inflation rate in the last 20 months, if I would have been that bad at my previous banking job for at least 3 months I would have been out of work, but they (government economists) are still trying to sort out the mess which they created in first place and bankers as well, oops!

[euro]

Good article indeed. Yes, as a newbie, they will enter and sell out of fear but that is not a sound strategy. An experienced trader know that fundamentally the market will bounce back after it dips a little so just cause its dips it doesn't mean that it will not bounce back so this is why long term trading absorbs more shocks and is lower risk than scalping but scalper get fearful quickly but fundamentally you know that the euro might rise almost daily during open market hours so you will ignore those dips as it will rise again in half an hour. Hopefully you have enough equity to cover it. 

[surya77]

current econocmic conditions is hard to realize we hope to become rich in quickly on forex trading, we must be patient more to get the result in forex trading.

[kenawly]

My big bro lost all of his 1000 dollars very easily thinking that forex trade does not need any knowledge. He spent the next 3 months learning more about it and since we decided to do it together with over 1500 dollars, we have survived till now but our profit margins are always too small.

[Decub]

A lot of people have that wrong impression about Forex and thinks it's a place where they can easily make quick money. Trading in Forex is a business that also requires a lot of patience and determination. It doesn't just come easy for a trader to become successful as a trader and not comes easy too.

[myregister]

Risk free trading never exist. It is simple people earn and someone could be loss. We are trading here means we are speculate in the market and trying to make more profit by the difference between it. As for emotion, it's us who should control it no one else or even that emotion which control us.