FOREX Trading Philosophy

FOREX Trading Philosophy

There are two common mistakes that many new FOREX traders make - trading without a strategy and letting emotions rule their decisions. You need a FOREX philosophy to be successful in FOREX trading.

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As you can imagine, many beginning FOREX traders are blinded by the allure of easy money.

Many FOREX websites offer "risk-free" trading, "high returns", "low investment". While these claims can, and often do, have at least a grain of truth in them, the reality of FOREX trading is a bit more complex.

There are two common mistakes that most beginning FOREX traders make:
  • Trading without a strategy and...
  • Letting emotion rule their FOREX trading decisions.
forex bullet proof trading system

Should You Start Trading Right Away or Stand Back and Watch?

After opening your first FOREX account it is going to be tempting just to dive right in and start trading. As you watch the movements of EUR/USD for example, you may feel that you are letting a great money-making opportunity slip away if you don't jump into the market immediately.

So, you buy and the next thing you know, you are watching the market move against you!

OMG! So, like so many other newbies, you panic and sell, only to see the market recover shortly after.

Learn Well, Little Grasshopper, or someone else will snatch the pebble from your hand!

This sort of undisciplined approach to FOREX trading is guaranteed to lose you money.  Serious FOREX traders need to have a rational trading strategy and not allow their emotions to rule their trading decisions.

Educate Yourself First

To make rational trading decisions the serious FOREX trader must be well-educated in market movements.  He or she must be able to apply technical studies to charts and reports in order to plot out entry and exit points.  He or she must take advantage of the various types of orders in order to minimize risks and maximize 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.

The 5 Major FOREX Trading Groups

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, FOREX or otherwise.

Besides knowing which currencies to trade and recognizing entry and exit signals, the successful trader has to manage resources and integrate money management into his or her 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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FOREX Trading Philosophy
Page Updated 9:19 AM Tuesday 2/5/2013