Forex trading has a reputation for being high risk and high reward. The high risk aspect of Forex trading derives from the fact that a lot of beginning traders use too much leverage. If a Forex trader starts out with $5000 in their account, the temptation to leverage it 50 to 1 in trades has a slim chance to make a profit and a large chance to wipe out the account.
All of the greatest traders in Forex, stocks and commodities know as much about how to manage their fund as they do about how to trade. Money management allows a trader to preserve funds even when a currency trade is going against them. With a successful trader being defined as one who profits around 54% of the time, it would only take one run away losing trade from the 46% to destroy a Forex account.
The critical concept is to make sure that if a particular trade does not perform as expected, it cannot completely take you out of the game of Forex trading.
As hard as it is to believe, many Forex traders refuse to take profits. The rationale behind this unfortunate tendency, is the expectation that profits will continue to accrue in an already profitable trade. Consistently profitable traders who make a constant income from Forex markets know that they have to take profits quickly.
Once a trade turns profitable, a professional will be looking for exit points to take profits of at least a portion of the total trade. Amateurs, and those that lose money in the Forex markets, will hold on to the entire trade and potentially see it go quickly into the negative.
Stops and limits put the trader in control of entry and exit points. With trailing stops being the best implementation or a trade where the position is profitable already, traders have the tools to remove risk while maintaining profits.
It is tempting to dream about hitting a home run trade that makes hundreds of thousands or millions of dollars. While these trades happen occasionally, the more realistic expectation is to earn a few hundred dollars per day consistently. Earning Forex income consistently requires using a trading system that minimizes risk, preserves profit, and looks for high probability trades. The single greatest mistake for beginning traders is not using a system.
By following these tips for getting involved with Forex markets, a trader can expect to outperform those that are not following these four critical recommendations.