Three Golden Rules for Damage Control in Forex Trading
By: Hillel Fuld
Many people around the world are now looking to Forex as a safe haven in these shaky financial times in which the future is accompanied with a big question mark. The Forex market enjoys a unique benefit, as a result of its size, that it is not affected by the recession. Traders can continue to profit from their trades even in these troubling times.
However, new traders, upon encountering Forex websites, whether it is sites belonging to brokers, auto traders, or any other Forex service, are quickly overcome with excitement at the thought of becoming wealthy overnight. There is no shortage of Forex sites promising traders immediate wealth and taking advantage of their Forex newbie status.
Smart traders, before beginning to trade, should spend significant time reading articles bolstering their Forex education before risking any money. The information available to traders online is literally endless with thousands of articles uploaded daily, people sharing their trading experiences on various platforms, and tutorials popping up in every corner. As a trader, this is bound to overwhelm you, and most new traders will want to hear a few golden rules that they can use to begin trading.
I am not claiming that you will become a Forex expert after implementing these rules, but I do think that if you properly internalize these points and use them effectively in your trades, you can avoid the disaster most traders experience when trading with no prior knowledge. I have said this many times before, and I will continue to say it, Forex has huge potential, but the danger is just as great.
The following are three golden rules of Forex trading, that if implemented, will give traders a head start over their colleagues:
Do Not Depend on Luck: If you are looking to make Forex and intend it to be a serious endeavor, you need to show you are serious and make a plan. Don't jump in without a trading strategy and money management techniques in place. Remember that no matter how good you are or how much of a natural trader you think you are, you will lose, and you will lose more than once. The big question is, and this is what separates the boys from the men, how are you going to handle those losing trades? Are you going to be forced to close your account because of 5 bad trades? If the answer is yes, you are doing something wrong.
Let's stop talking philosophy and get down to the numbers. Imagine for a second that you have decided to open an account with $10,000. You can now choose how much of that capital you are going to risk per trade. Obviously, the higher the risk, the more potential for profit, hence the famous saying “No pain, no gain”.
So if you decide to risk 10% of your entire account on each trade, simple math dictates that after 10 bad trades, you will be closing up shop. Now imagine you did the same thing but risked only 5% of your account per trade. You just doubled your chances of making it, or cut the chances of a margin call in half.
However, money management is not only about preventing margin calls, it is also an important tool in ensuring continuous and steady profits. The Forex industry is always evolving and new tools are introduced daily. Even now, as I write this, almost all Forex trading platforms offer important and useful tools that you must take advantage of, if you want to succeed. Set up Stop Losses, do not let your losses go on forever. Implement Take Profits, I know it is hard to stop the trade when you are ahead, but that is exactly what you need to do if you want to stay ahead.
Bottom line is, when it comes to trading Forex, you do not want to rely on your human emotions or your hunch, you want to depend on a well thought out strategy that makes sense and was custom tailored to meet your personality and trading needs.
Implement Bullet One: OK this is not just a fake point to add more meat to the article, this is real and crucial for your Forex success. Let me explain. It is easy to plan your strategy, it is a lot harder to put it into action when in the moment, and the strategy is telling you to do something that is the exact opposite of what your heart is telling you to do.
Studies have shown that close to 60% of Forex failures can be attributed to this one factor. People do not stick to their plans. You need to understand that Forex and emotions do not, and must not mix. If you are an overly emotional person who tends to get excited quickly or have been known to make rash decision in high pressured situations, you need to step away and let your technique do its work. Do not let your emotion dictate your Forex decisions, this will be your downfall.
If you are finding that you are not sticking to your trading plan and it is not the emotions getting in your way, the only other possibility is your lack of confidence in the plan itself. You need to do your research and make sure the plan you intend on using fits you perfectly. It might take some time to find, and you might feel like you want to get in and trade already, but skipping this step will almost definitely lead to your ultimate failure. It might not happen right away, but if you have no strategy, and you are trading randomly, you will eventually join the 90% of traders that fail at the Forex game. Make a plan and stick to it, no matter what.
Use Leverage Responsibly: Anyone who has ever visited a Forex website of any kind, has undoubtedly seen the words leverage and margin thrown around. First thing's first, margin and leverage are not the same thing. Margin is your money and leverage is the broker's. For clarity and emphasis, I am going to repeat that, leverage is not your money, it belongs to the broker and you are for all intents and purposes, borrowing that money.
Another important and possibly detrimental point that traders must understand when it comes to leverage is that while it increases your chances for larger profits, it also magnifies your risk and can easily lead to the destruction of your account.
Just to clarify, using a 100:1 leverage means you can now trade 100 times more money than you could have before borrowing that money. What is also means is that you have multiplied the speed at which you will lose that money by 100 as well. Using a high leverage is literally giving up the control of your account to someone else, namely the broker.
If you are sure you will win the trade, which you cannot be, use high leverage, because your profits will be multiplied. If you are unsure of the outcome of the trade, use this dangerous resource responsibly. Think of leverage, as I have said before, as the speed at which you are driving. The higher the leverage, the faster you are going. The faster you are going, the more deadly a small mistake can be.
There are many more tips that can be given to someone who is testing out the Forex waters for the first time, but I think it is safe to say that if the above three pieces of advice are understood properly and implemented correctly, disaster can be avoided.
Of course, if you want to make it big in the market, you are going to need to learn how to analyze the market, understand the fundamentals, and process the various technical indicators used in the Forex trading arena. The most important thing to do, and these three tips will assist you in doing it, is damage control, because as I explained above, no one trades Forex without experiencing losses. You are going to fall, the important questions are, are you going to get back up and are you going to learn from your mistakes?