CUT LOSSES

The single most important characteristic found within successful Forex traders is the ability to exit losing positions quickly. Losing trades are inevitable for high volume traders. Many novice traders are unwilling to recognize and accept when a position goes against them. Seasoned traders have learned to cut their losses on an adverse trade quickly. A reduced loss is no less valuable than a gain from a winning position. However, human psychology skews our perspective making a loss infinitely more painful than a gain is pleasurable. Overcoming this inherent human flaw is the first critical step towards becoming a Forex pro.

MONEY MANAGEMENT

Professional Forex traders employ detailed and strict money management regimens. Novice traders often get overly excited at the prospects of a given trade and plow into it full force. This behavior almost always translates to account blow-ups and Forex losers. Forex winners learn quickly that there isn’t any trade, no matter how attractive, that is worth risking more than 4% of your account balance. Those just starting out are advised to limit the risk associated with any single trade to 2% of the account balance. Forex professionals manage their risk assiduously.

KISS

Follow the famous advice of McDonald’s found Ray Kroc who said to “keep it simple, stupid!”. Many Forex traders fall victim to information overload, especially with many of the trading “command centers” available today which can display hundreds of data points. A Forex pro becomes a specialist in trading given pairs or spotting a specific group of indicators. By keeping it simple, you are able to become an expert in your Forex niche able to outwit other traders who do not possess your level of experience and knowledge within it.

PRACTICE MAKES PERFECT

The best Forex traders rigorously test their trading strategies before putting real money at risk. Myriad simulation programs exist, and most Forex brokerages provide for a “testing mode”. Overly anxious traders jump right in and often take losses while refining their strategy. A Forex pro fully tweaks the strategy in practice mode avoiding these initial losses thus positively impacting their net ROI.

KEEP YOUR COOL

Emotions are the enemy of all traders. Fear can often prevent a trader from executing upon a correct thesis at the right time. Greed can lead a trader to deviate from their money management rules in pursuit of the proverbial grand slam. Frustration can cause traders to chase losses and engage in the mortal sin of averaging down on losers. Impatience can cause traders to take positions before their strategy would otherwise dictate. All of these emotions prove detrimental to professional level Forex trading. Pro Forex traders execute their strategies remaining cool, calm and collected despite the often chaotic nature of the Forex market.

USE STOP LOSSES

A stop loss order is one which you define an amount of acceptable loss on a given trade. Pro traders religiously use stops and do not rely upon manual executions when it comes to limiting loss. Without a stop loss already in place, novice traders often allow the trade to keep going against them in the misguided hope it will soon turn thus preventing a loss. A stop loss works hand in hand with the rule dictating that traders seek to cut their losses on their bad trades. A stop loss is an effective tool which can be used towards enforcing discipline in this arena.

SET UP A POSITIVE RISK/REWARD EQUATION

Forex professionals ensure that each trade entails a positive expectation. The likelihood of success and potential pay-off must outweigh the odds of failure and the commensurate amount of loss. Shrewd Forex traders do not engage in coin flips. They seek trades where their research and strategy indicates that they have an edge. If you are able to maximize reward while minimizing risk, then mathematics dictate that you will profit nicely over the course of time.

LEVERAGE: YOUR BEST FRIEND OR WORST ENEMY

Many are drawn to the Forex market due to the extreme leverage that can be deployed within it. When the trade goes your way, leverage can produce obscene profits from only a small investment. Conversely, if a trade using 400:1 leverage goes against you, then it can wipe out your account in the blink of an eye. New traders should use leverage with extreme caution. Using leverage sparingly in order to juice your ROI is the sign of a pro Forex trader.

STUDY YOUR LOSSES

A normal human reaction to a loss is to try to forget it and put it behind you. However, pro Forex traders study their losses in order to derive lessons which can prevent the same scenario happening again. Oftentimes, analysis of your losing trades can help you glean critical information used to further tweak your trading strategy. Losses obviously aren’t fun, however, the ability to learn from them is the sign of a pro trader.

TIPS ARE FOR HORSE RACES

Novice Forex traders scour message boards and other chat forums seeking “tips” from random posters telling them which currency to buy or sell. It is a truism for both stocks and Forex that if anyone truly had any information of value, then they would not be sharing it for free in the Internet. This is even more salient in the realm of Forex where “inside information” regarding the movement of major currencies is a complete myth. Many forums can yield valuable information about strategies, indicators and money management techniques. However, view any outright trade advice posted on them with a huge grain of salt.

In the coming weeks we will further explore differing forex strategies, software, and brokers.

Foreign exchange (Forex or FX for short) involves the buying and selling of the major currencies found around the world.  The salient currencies most often traded by Forex participants include the U.S. Dollar, the Euro, the Japanese Yen, and the British Pound.  Each currency is valued against another currency; this is no different than what you see at a typical currency exchange shop while on vacation.

This one-on-one currency valuation is termed a “swap.” A Forex trading swap is simply understood by thinking in terms of how much of one unit of a currency can be swapped for another currency.  For instance, how many Japanese Yen can be bought for one U.S. Dollar?  To use round numbers for this example, assume the current quote on that swap entails one U.S. Dollar being worth 100 Japanese Yen.

If you trade Forex utilizing a Dollar/Yen swap, you can invest with one of two theses.  You can trade hoping the Dollar decreases in value against the Yen.  In this scenario you are “long” the Yen against the Dollar. Conversely, you can trade with the goal of the Dollar increasing in value against the Yen.  In this instance you would be “short” the Yen against the Dollar.

Analyzing the first scenario, assume you invested $100 going long the Yen against the Dollar.  Assume further that the Dollar/Yen exchange rate dropped from 100 Yen to the Dollar to only 90 Yen for one Dollar.  You essentially purchased 10,000 Yen on your initial trade ($100 invested purchasing 100 Yen for each Dollar).  Now that the quote has moved to 90, you are able to exit the trade redeeming your 10,000 Yen for $111.11 USD.  Consequently, you made $11.11 profit on this Forex trading transaction.

When you are “long” one currency against another, your hope is that the currency you own improves in value against the one on the other side of your swap.  Alternatively, when you are “short” one currency against another, your goal is for the currency you are short to decrease in value.  Hence, with Forex trading you can effectuate trades to capitalize on either projected strength or weakness of any major currency as quoted against any other major currency.

Valuations within the Forex trading universe change by the second.  This volatility allows for quick profits for Forex traders who are able to adeptly move in and out of various positions.  Today’s best traders are armed with sophisticated trading and execution programs, which give them a leg-up against the strong competition within the Forex trading environment.

Additionally, most of these programmed Forex trading vehicles allow for practice accounts, which allow new participants to formulate and refine their strategies without risking real money.  Those who have tired losing money to CEO scandals and irrational stock market events should explore removing those uncertainties by transitioning away from stocks in favor of trading Forex.