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With Forex, Education Comes First
Forex trading is more complicated than you think and if you wish to come out ahead, there are certain guidelines you must follow.
The first thing of which you must be aware is that throwing yourself full force into the Forex markets without proper knowledge is a guarantee of failure. It is paramount that you understand the essentials of the currency markets and how Forex is traded. A proper tutorial on the basics of Forex trading is offered free by most Forex brokers and you should take advantage of this opportunity before even opening an account or placing your first trade.
Once you have the basics down pat, you are ready to formulate your own personal trading strategy. You can confer with more experienced traders and see which strategy best suits your needs and personality. If you start trading without a defined philosophy, you will lose your money before leaving the starting gate.
Your custom made strategy must guide you throughout your trading experience. You must be disciplined enough to abide by it and not waiver when things donít go as anticipated. If you let emotions enter the equation, you will end up exiting or entering the market at the wrong times and are doomed to failure.
Learn to recognize trading signals and watch the trends so you know when to enter and exit and which currency pair to trade. Graphs and charts are useful tools so knowing how to interpret them can lead to more successful trading.
Managing your money is also vital to profitable Forex trading. There are countless strategies that can be applied to money management, but most require you to keep a track of what is known as your core equity. Your core equity is the total amount that you begin trading with minus the funds that you have in any open positions. In other words, if you begin trading with $20,000 and have $2,500 in open positions then your core equity is $17,500.
It is advisable to new traders to start out with a risk level of between 1% and 3% of each trade. For example, if you are trading a standard Forex lot of $100,000 you should limit your risk to $1,000 to $3,000 probably starting with just $1,000. This can be achieved by putting a stop loss order 100 pips (1 pip = $10) above or below the position at you enter a trade.
During the course of trading, as the price of the trade moves up or down, your core equity will adjust accordingly and the risk factor will be different. In the above example, if your core equity is now standing at $17,500 and you take out a second position with the same amount of $2,500, your new core equity will now be $15,000.
It is up to you to decide how much risk you are willing to take and set your core equity accordingly. If, for example, you make a profit of $10,000 and your core equity is now $30,000, you then have the choice of either raising your risk level by trading the same amount you have traded till now or raise your risk even more by adding to the amount originally invested.
Risk management is an important control tool when trading Forex. Without proper control you stand little chance of being a successful Forex trader.
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.