Determining Your Forex Trading Philosophy

The allure of “easy money” is what draws some to begin FOREX trading. There are FOREX websites whichoffer “risk-free” trading, “high returns”, “low investment.” While these claims may have a grain of truth in them the reality of trading in FOREX is more complex.

Some Mistakes Beginning Traders Make
The most common two mistakes that many beginner traders make are trading without a strategy in place and allowing their emotions to dictate their actions. Beginning traders may be tempted to dive right in and start trading upon opening a FOREX account. They may feel after watching the movements of EUR/USD for example that they are missing an opportunity by not entering the market immediately. They buy and watch the market move against them and then panic and sell only to see the market recover.

This sort of undisciplined approach to FOREX is almost guaranteed to have an unfavorable end and cost the loss of money. It is important to have a rational trading strategy when trading FOREX and not make trading decisions in the heat of the moment.

You Need To Understand Market Movements
Forex traders should be well educated in market movement to make rational trading decisions. They should be able to apply technical studies to charts and plot out entry and exit points. They should be able to take advantage of the various types of orders to minimize risk and maximize profit.

One of the first steps in becoming a successful FOREX trader is to understand the market and the forces behind it. Who trades FOREX and why? This will assist in identifying successful trading strategies and applying them.

Accountability
There are 5 major groups of investors that participate in FOREX: governments, banks, corporations, investment funds, and traders. Each group with its own objectives, but the one thing all groups except traders have in common is external controls. Each 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. The large organizations and educated traders approach the forex market with strategies, the beginner trader must also follow suit if they hope to be successful.

Money Management
The successful trader has to manage his resources and make money management apart of his trading plan along with knowing which currencies to trade and how to recognize entry and exit signals. Money management is an integral part of any trading strategy. 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 Limiting Risk
Try to limit your risk to 1% to 3% of each trade when entering a 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. You do this with a stop loss order 100 pips (1 pip = $10) above or below your entry position.

Adjust the dollar amount of your risk as your core equity rises or falls. 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.