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FOREX Trading Philosophy
Many beginning FOREX traders are captivated by the allure of
easy money. 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.
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. FOREX traders need to have a rational trading
strategy and not allow emotions to rule their trading
decisions.
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.
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.
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.
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.
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