Risks of Trading Forex
The first thing to always remember, there is a high level of risk when trading Forex. Individuals choose to trade Forex for the quick profits which can be earned on relatively small account balances. The flip side to quick profits is quick loses. The novice Forex trader who asks, how can I learn to invest safely in the forex market? will be a step ahead in the long run towards long-term, profitable trading.
In Forex trading there will never be a level of safety where you are not exposed to losing trades. All traders have losing trades. The skills to learn are how to control the losses from the losing trades so the winning trades result in a growing account balance.
Controlling Forex Losses
The tool Forex traders use to limit losses on a losing trade is the stop loss order. A stop loss is set up to close out a Forex trade if the currency moves in the wrong direction. In a trading account, stop losses are called limit orders. A buy limit is used if a sell order was used to open the trade and a sell limit is used if a buy order opened the trade. Forex trading is based on currency pairs and a buy is used if one side of the pair is expected to rise and a sell trade profits from an increase in the other side of the currency pair.
Limits on each trade should be set at the opposite trend line from the trade direction or 2 to 3 percent of the trading account value, which ever is less. Setting limit orders is based on the account value and the position size used on the account. The standard positions size in Forex is $100,000; a mini-unit is $10,000 and a micro trade unit is $1,000. Pip value for the three sizes is $10.00, $1.00 and $0.10, respectively. A trader with a $1,500 account should not trade full size units. Two percent of the account is $30, which is only 3 pips. This trader should be making trades in 5 micro-unit amounts. Two percent of the account is 60 pips, which allows a trade some flexibility to see if the trade will work as planned.
Practice Trading Accounts
Most Forex brokers offer free practice trading accounts. Extensive use of practice accounts will allow you to teach yourself how to trade with minimal losses. Use the practice account to first learn how to enter and close trades. Then start setting up the charts and indicators in a manner consistent with your trading strategy. Practice and refine your strategy until you are a profitable trader using the practice account. There are no trading strategies you can find or buy that will generate safe, automatic trading.
Depending on the time you have available to practice, you may spend 3 to 6 months with the practice account before switching to live money trading. There is no reason to trade Forex with real money until you are consistently profitable with the practice account. Forex brokers usually set up a practice account for 30 days, but you can re-sign up when the time is up. Practice trading and the effective use of stop loss orders are the keys on how to learn to invest safely in the Forex market.
For more tips and strategies, be sure to check out the other items in Bright Hub’s Collection of Forex Trading Guides.
- The Complete Guide to Day Trading by Markus Heitkoetter, 2008. https://www.amazon.com/Complete-Guide-Day-Trading-Professional