Is Forex Trading for Everyone?
Successfully trading the Forex market requires you to have the discipline to
follow some rules. If you can "stay the course" and follow your system,
regardless of what the market is doing, you can make money trading Forex.
As with most forms of financial investing - stocks, futures, etc., there are
risks. There are no crystal balls to show you what is going to happen next, so
your exposure to these risks is largely controlled by your money management
practices.
Casinos operate, normally with extensive profits, based entirely on risk
management. They have learned how to take advantage of probability, which is the
same concept traders rely upon, and turn the tables in their favor. They have
learned that the longer they can keep a gambler in their facility, the better
the odds they will end up with the gambler's money.
Many new or inexperienced Forex traders fall victim to the hype surrounding
foreign exchange trading. The electronic trading platforms used by retail Forex
traders today, with their ability to display hundreds of "indicators" and
present price data instantly, confuse many traders and actually lure them into
making poor trading decisions.
Like futures, Forex trading offers high leverage. The readily available leverage
of up to 400:1 has destroyed many potential trading careers. New traders,
unaccustomed to the volatile nature of Forex, often fall into the trap of
over-leveraged positions, which easily wipe out trading accounts.
Forex generally has some of the most predictable trends of all the markets over
the longer term. However, many traders lose sight of the long term picture and
try to trade based upon shorter term price charts. They believe shorter trends
offer easy opportunities for profit, when in truth, most seasoned traders won't
even look at charts of less than 1 hour.
The volatility of Forex means that a tight stop-loss order will usually result
in being stopped-out of many trades. Too many trades ending in this fashion
result in your trading account being slowly eroded away. Traders need to keep
their "real leverage" (amount of currency controlled divided by their actual
account size) at 3:1 or less. This will allow you to relax your stop-loss
settings and enjoy more successful trades.
In the currency market, you don't have to worry (normally) about countries going
broke. Typically the prices move in large waves, and if you had deep enough
pockets, you could wait for the price to recover to profitable levels. The
reality is this process could take years, so money management is again key.
Another benefit of this huge market is it's liquid nature. It's trading volume
of approximately 2 trillion dollars per day ensure there can be no insider
activities. Even the largest of central banks lack sufficient funds to seriously
sway the market. Market moving data is released for all to see at the same time.
No one has advance information of pending releases.
In conclusion, trading the Forex currency market is no more difficult than the
stocks or futures markets, and in fact has several advantages. To trade
profitably in the currency market, you need to stick to leverage of no more than
3% to 5%, and think "longer term". The lower leverage will allow you to ride the
fluctuations which are common to Forex, while enjoying the benefits of long term
trending.
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