Thursday, September 3, 2009

In Canada Can You Become A Great Forex Trader?

Take a $1000 starting balance and a leverage of 200:1. A mere 10 pips move against you would result into 20% of your account equity getting wiped out if you were to trade $200,000 in EUR/USD.First practice on your forex demo account. Know candlestick patterns. Learn aboutfibonacci retracement.

Suppose the spread is only 3 pips. In fact, you are having a trading cost of $60 just by entering the trade and you are down 6% on a trade.

$60 trading cost on $1000 equity is not a small thing. This is much more than any permissible loss. Any market noise is bound to wipe out your account size. Trading position sizes this big in relation to your account size means that you are essentially trading yourself into a corner.

If you are overleveraging your trades, than you may as well hand over your money directly to your forex broker instead of losing it in a trade. Forex brokers love this. As this is easy money for them.

Professional money managers don’t use more than 2-5 times leverage level. The retail investor should definitely not use more than 10 times. It means if you have a starting balance of $1000, the price would have to move 1000 pips against you before your account get wiped out.

So you get more room to maneuver and it gives you more flexibility with a leverage level of 10. Choosing the right amount of leverage is the first critical step in maintaining your flexibility in the market.

Flexibility is critical for you if you want to survive in the forex market long term. Flexibility in trading means giving you options. Options to enter into a trade! Stay in it and get out of it.

By becoming overexposed to any one position, you essentially remove options from your table until you are faced with an all or nothing trade. In the forex world, your survival is measured in days not years.

Most traders have had the frustrating experience of getting stopped out. Only to see the market return back to your entry point some times later on in the day. The only way to stay out of such situations is to stay flexible and trade multiple lots.

You should consider your initial entry as your toes testing the temperature of the market. If you find it too cold, then you should sit it out. By trading only one lot you are betting that the market will move 50/50 in your favor.

But if you find the temperature right, just jump right in. Trading small until you think you have all the information and confirmation you need gives you the flexibility to properly position yourself for the move or pull out with a small loss if your analysis proves correct.

Trading this way also means missing out on far fewer trades since pulling the initial trigger becomes less painful making the decision process much less stressful trades when compared to the all in one approach.


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