The Essential FOREX Trading Basics

No matter what your trading goals are, creating a few basic fundamentals and sticking to theme is essential to success. Many new traders jump right onto their platform and start trading without any type of plan or rules to follow. This is ultimately why the majority of all FOREX traders fail and lose money. Either way, here are a few basics and concepts that every up and coming superstar trader should grasp before even thinking about going live. You can check out http://wallstreetfactory.com/ for more free FOREX tools and information.

Baseball Analogy

Have you ever head someone talking about the sport of pro baseball say that baseball is the only sport where you can fail 7 out of 10 times and still go to the hall of fame? Well whoever started saying that was wrong. Because not only can you do that in the big leagues The same applies for currency trading as well, if you set up your trading system properly. Check it out:

The plot:

You are a medium term swing trader and look for trading opportunities with a potential for 240 pips on the up side with no more than 80 pips on the downside, giving you a 3:1 win to loss ratio. Now you are not Ty Cobb batting .366 career, but if you can consistently do this, you can consider yourself Albert Pujols, a .333 hitter. After doing thorough analysis and following your trading plan, you place your limit and stop and these two levels respectively and just like Ron Popeil, you set it and forget. Let's say you do this ten times over the course of the day and it looks something like this.

Loss -80
Loss -80
Win +240
Loss -80
Loss -80
Win +240
Loss -80
Loss -80
Loss -80
Win +240

It comes out to -560 pips in losing trades and +720 in winning trades. All in all, you made 160 pips trading either one mini or standard lot each time. Obviously if you were trading more you'd multiply your wins and losses, and your end product by that number.

We have outlined a few basic points that every successful trader implements. In addition, you will incorporate your own game plan and trading strategies.

Cut your losses short and let your profits run - This sounds simple enough, but there are so many amateur traders that constantly break this rule. People often feel uncomfortable sitting on profitable positions, and they will take their profits before their original targets are hit. On the other hand, an amateur will sit on a losing position in the hope that it will turn around. When trading, it is always important to cut your small losses before they turn into large losses, and to let your profits run until your profit target or your preset stop is hit.

Do not let your emotions interfere with your trading decisions - The reason why many beginners fail to cut their losses short and let their profits run is that they let their emotions cloud their judgment. They are often so excited to see a profit that they'll close their position before it even gets close to the target. The same people will hold on to their losing trades because it eats them up to take a loss, so they just pray for their position to rebound. It is crucial not to get emotional about trading. You must always remain calm and make logical decisions.

Always use stop losses when you place orders - A stop loss is an order to close a position when a preset price level is hit. If you buy a certain currency pair, a stop loss will protect you in case the price plummets when you are not in front of your trading station. Similarly, if you sell a certain currency pair, it will protect you in case the price suddenly skyrockets. Some people use "mental" stops, whereby having predetermined stop levels in their heads, but without placing the stop order. It is highly recommended that you always place a stop loss order to ensure that your losses will be cut quickly.

Do not get attached to your trade - Even if you have a long-term outlook for a currency, but the price moves against you, you should cut your loss and get out of the position. You can always buy or sell the currency again at any time, to keep with your long-term price outlook. But, always be safe and get out of the position if the price moves against you, even if it means getting right back into the position soon after.

Trade with a plan - Currency trading is a serious business for many. You wouldn't go out and make important business decisions on a hunch or a whim. Neither should you place a trade on a hunch or a "good feeling." Always have a specific plan or trading system in place before placing a trade. This plan should include the use of stop and limit orders, should the unexpected occur. It is therefore extremely important for new traders to spend some time practicing on a demo account before trading in a live account. It is the best way to find the system that works for you, without risking real money in the process.

Do not over-trade - One of the biggest mistakes that new traders make is trading too large a position in relation to their account equity. They over-leverage themselves, and that can easily knock out their entire position. It is important that you understand how leverage works. If a margin requirement is 1%, then you're controlling 100X your money. Therefore, if you're managing $100,000 – and you have 10 lots, for every 1 cent move to the downside, you will lose $10,000. If the EUR/USD moves 5 cents, you can potentially lose $50,000. Although you can trade much more than the money you actually put up, you can also get knocked out much quicker. Leverage is a double-edged sword, so always be aware and careful. As a general rule of thumb, it is recommended that you not trade with more than 5-10% of your account value at any given time. Prudent money managers will not risk more than 2% of the entire portfolio.

Source : articlescity