Forex Currency Trading

Forex Trading Investment Protection

FXCM.com

The foreign exchange market is one of most popular markets for speculation, due to its enormous size, liquidity and tendency for currencies to move in strong trends. Presumably, these characteristics would enable traders to have tremendous success. However, success has been limited mainly for the following reasons.

Many traders come with false expectations of the profit potential and lack the discipline required for trading. Short term trading is not an amateur's game and is usually not the path for quick riches. Because currencies may seem exotic or less familiar than traditional markets (i.e. equities, futures, etc.), it does not mean that the rules of finance and simple logic are suspended. One cannot hope to make extraordinary gains without taking extraordinary risks. A trading strategy that involves taking a high degree of risk means suffering inconsistent trading performance and often suffering large losses. Trading currencies is not easy (if it was, everyone would already be a millionaire), and many traders with years of experience still incur periodic losses. One must realize that trading takes time to master and there are absolutely no short cuts to this process.

The most enticing aspect of trading currencies is the high degree of leverage used. Leverage seems very attractive to those who are expecting to turn small amounts of money into large amounts in a short period of time. However, leverage is a double-edged sword. Just because one lot ($100,000) of currency only requires $1000 as a minimum margin deposit, it does not mean that a trader with $10,000 in his account should easily be able to trade 10 lots or even 5 lots. One lot is $100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves (take a position that is too big for their portfolio), and as a consequence, often end up forced to exit a position at the wrong time.

If an account value is $10,000 and the trader places a trade for 1 lot, he is in effect, leveraging himself 10 to 1, which is a very significant level of leverage. Most professional money managers are not allowed to leverage even this high. Trading in small increments on the account will allow the trader to endure many losing trades without experiencing large monetary losses.

Getting Started - Use a Demo Account

FXCM provides you with access to a live trading platform with a virtual balance of $50,000. The account looks, feels, and behaves identically to the real FXCM trading system including price action, and trade execution.

How much do I believe the market will move and where do I want to take my profit?

Limit orders allow traders to exit the market at profit targets. If you are short, (sold) a currency pair, the system will only allow you to place a limit order below the current market price because this is the profit zone. Similarly if you are long, (bought) the currency pair, the system will only allow you to place a limit order above the current market price. Limit orders help create a disciplined trading methodology and enable traders to walk away from the computer and to avoid constantly monitoring the market.


How much am I willing to lose before I exit the position?

Stop/Loss orders allow traders to set an exit point for a losing trade. If you are short a currency pair, the stop/loss order should be placed above the current market price. If you are long the currency pair, the stop loss order should be placed below the current market price. Stop/Loss orders help traders control risk by capping losses. Stop/Loss orders are counter-intuitive because you do not want them to be hit, however, you will be happy that you placed them! When logic dictates, you can control greed.


Where should I place my stop and limit orders?

As a general rule of thumb traders should set stop/loss orders closer to the opening price than limit orders. If this rule is followed, a trader needs to be right less than 50% of the time to be profitable. For example, a trader that uses a 30 pip Stop/Loss and 100 pip limit orders, needs only to be right 1/3 of the time to make a profit. Where the trader places the stop and limit will depend on how risk-adverse s/he is. Stop/Loss orders should not be so tight that normal market volatility knocks the position out. Similarly, limit orders should reflect realistic expectation of gains given the markets trading activity and the length of time one wants to hold the position.