Forex Trading

So what is is Forex trading you may ask? Forex is the exchange you can buy and sell currencies. For example, you might buy British pounds (by exchanging them to the dollars you had), then, after pounds / dollar ratio goes up, you sell pounds and buy dollars again. At the end of this operation you are going to have more dollars, then you had at the beginning.

The Forex market has much higher liquidity, then the stock market, as much more money is being exchanged. Forex is spread between banks all over the planet and as a result it means 24 hour trading.

Unlike stocks, Forex trades are performed with high leverage, usually it is 100. It means that by investing $1000 you can control $100,000, and increase potential profits accordingly. Some brokers provide also so called mini-Forex, where the size of minimum deposit equals $100. It makes possible for individuals to enter this market easily.

The name convention. In Forex, the name of a "symbol" is composed of two parts - one for first currency, and another for the second currency. For example, the symbol usdjpy stands for US dollars (usd) to Japanese yen (jpy).

As with stocks, you can apply tools of the technical analysis to Forex charts. Trader's indexes can be optimized for Forex "symbols", allowing you to find winning strategy.

Example Forex transaction

Assume you have a trading account of $25,000 and you are trading with a 1% margin requirement. The current quote for EUR/USD is 1.3225/28 and you place a market order to buy 1 lot of 100,000 Euros at 1.3228, expecting the euro to rise against the dollar. At the same time you place a stop-loss order at 1.3178 representing a maximum loss of 2% of your account equity if the trade goes against you, 50 pips below your order price, and a limit order at 1.3378, 150 pips above your order price. For this trade, you are risking 50 pips to gain 150 pips, giving you a risk/reward ratio of 1 part risk to 3 parts reward. This means that you only need to be right one third of the time to remain profitable.

The notional value of this trade is $132,280 (100,000 * 1.3228). Your required margin deposit is 1% of the total, which is equal to $1322.80 ($132,280 * 0.01).

As you expected, the Euro strengthens against the dollar and your limit order is reached at 1.3378. The position is closed. Your total profit for this trade is $1500, each pip being worth $10.

Investing in Forex

Investing in foreign currencies is a relatively new avenue of investing. There are considerably fewer people are aware of this market than there are people aware of several other avenues of investing. Trading foreign currency, also known as forex, is the most lucrative investment market that exists. There are several factors that make this true among which, successful forex traders earn realistic profits of one hundred plus percent each month. Compared to some of the better known investment markets such as corporate stocks, this is an unheard of return on investment. It's very necessary to mention here that a person who invests in forex must, without exception, make it a point to learn the detailed, but simple strategies and information surrounding the market. This very fact is what makes the difference between successful forex traders and other traders.

A few additional points, which create such powerful leverage for investors within the forex market are: The amount of capital required to begin investing in the market is only three hundred dollars. For the most part, any other investment market is going to demand thousands of dollars of the investor in the beginning. Also, the market offers opportunities to profit regardless what the direction of the market may be; In most commonly known markets investors sit and wait for the market to begin an up trend before entering a trade. Even then, investors, as a rule must sit and wait some more to be able to exit the trade with a nice profit. Given that the forex market produces several up, down, and sideways trends in a single day, it can easily be seen that forex stands head and shoulders above other markets. Additionally there are trading strategies, which are taught that provide for compounded profits; these are profits on top of profits. In addition, free demo accounts are available within the industry of forex trading, which facilitate the sharpening of skills without the risk losing any capital. And the advantage regarding the time factor in trading foreign currency is a very attractive point for any investor. Compared to one of the most sought after avenues of investing, which often requires forty or more hours each week, namely in the real-estate market, the forex market requires a much smaller demand on the investor's time. Forex trading requires approximately ten to fifteen hours each week to earn a full time income. It's easy to see that the advantages and great leverage that exist in the forex market, make it among the most lucrative, time liberating, and easy to enter by far.

I hope this information gives you a clear understanding of how you can turn your investing into a true method of making your money work harder for you.

Don’t Overtrade

If you are experiencing a run of wins, don't get getting carried away in the flush of success. You don't want to give it all back. Over Trading is the greatest single cause for losses in the markets. Whether you are winning now or losing now, ninety-five or more percent of all traders trade too often.

Even a daytrader trading a five minute chart has no need to trade every day nor to trade all day long. You should be filtering your trades so that you take only the best of the best.

Overtrading was a problem that took me a long time to overcome because I did not know what I was looking for. Overtrading is a very serious problem, and veteran traders learn to avoid it. In fact, one way to know if a trader is a mature professional is to know if that trader conquered the problem of overtrading.

The biggest problem with overtrading is that you don't even know you're doing it. You can overtrade by trading too many contracts (too much size), trading too often, attempting too many positions or sitting and staring at the screen all day.

One trader I met, who was following a system in twenty markets, received entry signals in fourteen of the twenty. The entry prices were such that probably only two or three of them had any chance of being filled. Yet this trader boldly called in to enter all fourteen orders. After the first six, his broker refused to take any more orders. Had they all been filled, the trader would have been several thousand dollars over margin.

Good traders immediately cut back on size when they are losing or have an equity draw-down.

The total commitment you make on any entry should be relative to a reasonable expectation of the profit potential for that trade. Each trade is different and must be weighed on its merits.

How do you know how many contracts to trade? Certainly you are in a pickle if you always have to trade in single lots. That is not to say that there are never times when a single lot is the right thing to do. It’s okay when you’re scalping , or trading options . However, wherever possible try to trade a least two contracts. You need one to cover costs, and the other to give you a profit.

If it's late in the day and you are a daytrader who normally does a five lot, perhaps you should use a smaller size due to the fact that the trade hasn't as much time to develop as one made earlier in the day.