While Forex is a high-risk investment, there are certain steps that can lead to better performance over the long run. Learn how to trade for the best chance at making a profit.
Forex trading involves buying and selling currency pairs online. The development of software which allows investors to place orders from home whenever the market is open has led to a boom in the number of people asking can Forex trading make you money. Because currency speculation has a lot of volatility, investors should always be careful not to put too much of their net worth into opening new positions. However, there are certain guidelines which successful traders adhere to which can keep you from facing unnecessary risk.
Don’t Confuse Win Rates with Profitability
When you close each trade, either manually or by using a program working according to parameters you set, you need to factor in not only if you have chosen the right asset and direction, but how much you can expect to make off that order. You can lose money even if most of the positions you open are “winners”, if the trades you get wrong lose more money than you earn with the trades you get right.
The easiest way to keep losses from wiping out previous earnings is to set a maximum deficit amount for each trade as you open them. This is done with a stop-loss order, which automatically closes the position if it goes negative over a certain point, which you select. The best part about stop-loss orders is that it takes the emotion out of trading. People tend to wait to long to get out of a losing position because it hurts to admit that you were wrong. Just remember, no one has a 100 percent success rate.
Watch Your Leverage
One of the advantages of working with currency pairs is that you can trade on margin. This means you only need to put up a fraction of the true value of an order when you open it. However, this can also be a problem, since it also increases the amount you owe if your position goes against you. Many traders limit their leverage amounts to 20:1 or less. With a 20:1 margin, you can control $200,000 in trades with $10,000 in account equity. But if your order falls by 100 pips, you lose $2000.
Let’s compare this to trading on 200:1 margin, which is offered by many brokers. With the higher level of leverage, you can control $2,000,000 in trades with the same equity, but that 100-pip loss could cost you $20,000. Which means you might have to find an additional $10,000 just to bring your account back up to zero. Can you absorb that kind of risk?
Appropriate risk management is one of the most important parts of FX investing. By following a few simple rules, you can reduce the impact of some common ways in which currency traders lose money, although you will never be able to completely avoid the consequences of participating in a highly volatile market. If you would like to learn more about trading smarter, make sure to visit our web page.