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10 ways to avoid losing money in forex

The global forex market does more than $5 trillion in average daily trading volume, making it the largest financial market in the world. Forexís popularity entices foreign-exchange traders of all levels, from greenhorns just learning about the financial markets to well-seasoned professionals. Because it is so easy to trade forex Ė with round-the-clock sessions, access to significant leverage and relatively low costs Ė it is also very easy to lose money trading forex. Here are 10 ways that traders can avoid losing money in the competitive forex market.

1. Do Your Homework Ė Learn Before You Burn

Just because forex is easy to get into, it doesnít mean that due diligence can be avoided. Learning about forex is integral to a traderís success in the forex markets. While the majority of learning comes from live trading and experience, a trader should learn everything possible about the forex markets, including the geopolitical and economic factors that affect a traderís preferred currencies. Homework is an ongoing effort as traders need to be prepared to adapt to changing market conditions, regulations and world events. Part of this research process involves developing a trading plan Ė a systematic method for screening and evaluating investments, determining the amount of risk that is or should be taken and formulating short- and long-term investment objectives.

2. Take the Time to Find a Reputable Broker

The forex industry has much less oversight than other markets, so it is possible to end up doing business with a less-than-reputable forex broker. Due to concerns about the safety of deposits and the overall integrity of a broker, forex traders should only open an account with a firm that is a member of the National Futures Association (NFA) and that is registered with the U.S. Commodity Futures Trading Commission (CFTC) as a futures commission merchant. Each country outside of the United States has its own regulatory body with which legitimate forex brokers should be registered.

Traders should also research each brokerís account offerings, including leverage amounts, commissions and spreads, initial deposits, and account funding and withdrawal policies. A helpful customer service representative should have all this information and be able to answer any questions regarding the firmís services and policies.

3. Use a Practice Account

Nearly all trading platforms come with a practice account, sometimes called a simulated account or demo account. These accounts allow traders to place hypothetical trades without a funded account. Perhaps the most important benefit of a practice account is that it allows a trader to become adept at order-entry techniques.

Few things are as damaging to a trading account (and a traderís confidence) as pushing the wrong button when opening or exiting a position. It is not uncommon, for example, for a new trader to accidentally add to a losing position instead of closing the trade. Multiple errors in order entry can lead to large, unprotected losing trades. Aside from the devastating financial implications, this situation is incredibly stressful. Practice makes perfect: Experiment with order entries before placing real money on the line.

4. Keep Charts Clean

Once a forex trader has opened an account, it may be tempting to take advantage of all the technical analysis tools offered by the trading platform. While many of these indicators are well-suited to the forex markets, it is important to remember to keep analysis techniques to a minimum in order for them to be effective. Using multiples of the same types of indicators Ė such as two volatility indicators or two oscillators, for example Ė can become redundant and can even give opposing signals. This should be avoided.

Any analysis technique that is not regularly used to enhance trading performance should be removed from the chart. In addition to the tools that are applied to the chart, pay attention to the overall look of the workspace. The chosen colors, fonts and types of price bars (line, candle bar, range bar, etc.) should create an easy-to-read-and-interpret chart, allowing the trader to more effectively respond to changing market conditions.

5. Protect Your Trading Account

While there is much focus on making money in forex trading, it is important to learn how to avoid losing money. Proper money management techniques are an integral part of successful trading. Many veteran traders would agree that one can enter a position at any price and still make money Ė itís how one gets out of the trade that matters.

Part of this is knowing when to accept your losses and move on. Always using a protective stop loss (a strategy designed to protect existing gains or thwart further losses by means of a stop-loss order or limit order) is an effective way to make sure that losses remain reasonable. Traders can also consider using a maximum daily loss amount beyond which all positions would be closed and no new trades initiated until the next trading session. While traders should have plans to limit losses, it is equally essential to protect profits. Money management techniques, such as utilizing trailing stops (a stop order that can be set at a defined percentage away from a securityís current market price) can help preserve winnings while still giving a trade room to grow.

6. Start Small When Going Live

Once a trader has done his or her homework, spent time with a practice account and has a trading plan in place, it may be time to go live Ė that is, start trading with real money at stake. No amount of practice trading can exactly simulate real trading. As such, it is vital to start small when going live.

Factors like emotions and slippage (the difference between the expected price of a trade and the price at which the trade is actually executed) cannot be fully understood and accounted for until trading live. Additionally, a trading plan that performed like a champ in backtesting results or practice trading could, in reality, fail miserably when applied to a live market. By starting small, a trader can evaluate his or her trading plan and emotions, and gain more practice in executing precise order entries Ė without risking the entire trading account in the process.

7. Use Reasonable Leverage

Forex trading is unique in the amount of leverage that is afforded to its participants. One of the reasons forex is so attractive is that traders have the opportunity to make potentially large profits with a very small investment Ė sometimes as little as $50. Properly used, leverage does provide potential for growth; however, leverage can just as easily amplify losses. A trader can control the amount of leverage used by basing position size on the account balance. For example, if a trader has $10,000 in a forex account, a $100,000 position (one standard lot) would utilize 10:1 leverage. While the trader could open a much larger position if he or she were to maximize leverage, a smaller position will limit risk.

8. Keep Good Records

A trading journal is an effective way to learn from both losses and successes in forex trading. Keeping a record of trading activity containing dates, instruments, profits, losses, and, perhaps most important, the traderís own performance and emotions can be incredibly beneficial to growing as a successful trader. When periodically reviewed, a trading journal provides important feedback that makes learning possible. Einstein once said that ďinsanity is doing the same thing over and over and expecting different results.Ē Without a trading journal and good record keeping, traders are likely to continue making the same mistakes, minimizing their chances of become profitable and successful traders.

9. Understand Tax Implications and Treatment

It is important to understand the tax implications and treatment of forex trading activity in order to be prepared at tax time. Consulting with a qualified accountant or tax specialist can help avoid any surprises and can help individuals take advantage of various tax laws, such as marked-to-market accounting (recording the value of an asset to reflect its current market levels). Since tax laws change regularly, it is prudent to develop a relationship with a trusted and reliable professional who can guide and manage all tax-related matters.

10. Treat Trading As a Business

It is essential to treat forex trading as a business and to remember that individual wins and losses donít matter in the short run; it is how the trading business performs over time that is important. As such, traders should try to avoid becoming overly emotional about either wins or losses, and treat each as just another day at the office. As with any business, forex trading incurs expenses, losses, taxes, risk and uncertainty. Also, just as small businesses rarely become successful overnight, neither do most forex traders. Planning, setting realistic goals, staying organized and learning from both successes and failures will help ensure a long, successful career as a forex trader.

The Bottom Line

The worldwide forex market is attractive to many traders because of its low account requirements, round-the-clock trading and access to high amounts of leverage. When approached as a business, forex trading can be profitable and rewarding. In summary, traders can avoid losing money in forex by:

  • Being well-prepared
  • Having the patience and discipline to study and research
  • Applying sound money management techniques
  • Approaching trading activity as a business

Making money in forex is easy if you know how the bankers trade!

How to make money in forex?

Iím often mystified in my educational forex articles why so many traders struggle to make consistent money out of forex trading. The answer has more to do with what they donít know than what they do know. After working in investment banks for 20 years many of which were as a Chief trader its second knowledge how to extract cash out of the market. It all comes down to understanding how the traders at the banks execute and make trading decisions.

Why? Bank traders only make up 5% of the total number of forex traders with speculators accounting for the other 95%, but more importantly that 5% of bank traders account for 92% of all forex volumes. So if you donít know how they trade, then youíre simply guessing. First let me bust the first myth about forex traders in institutions. They donít sit there all day banging away making proprietary trading decisions. Most of the time they are simply transacting on behalf of the banks customers. Itís commonly referred to as Ďclearing the flowĒ. They may perform a few thousand trades a day but none of these are for their proprietary book

How do banks trade forex?

They actually only perform 2-3 trades a week for their own trading account. These trades are the ones they are judged on at the end of the year to see whether they deserve an additional bonus or not.

So as you can see traders at the banks donít sit there all day trading randomly Ďscalpingí trying to make their budgets. They are extremely methodical in their approach and make trading decisions when everything lines up, technically and fundamentally. Thatís what you need to know!

As far as technical analysis goes it is extremely simple. I am often dumbfounded by our clientís charts when they first come to us. They are often littered with mathematical indicators which not only have significant 3-4 hour time lags but also often contradict each other. Trading with these indicators and this approach is the quickest way to rip through your trading capital.

Bank traderís charts look nothing like this. In fact they are completely the opposite. All they want to know is where the key critical levels. Donít forget these indicators were developed to try and predict where the market is going. The bank traders are the market. If you understand how they trade then you donít need any indicators. They make split second decisions based on key technical and fundamental changes. Understanding their technical analysis is the first step to becoming a successful trader. Youíll be trading with the market not against it.

What it all comes down to is simple support and resistance. No clutter, nothing to alter their trading decisions. Simple, effective and highlighting the key levels. Iím not going to go into the ins and outs of where they actually enter the market, but let me say this: itís not where you think. The trendlines are simply there to indicate key support and resistance. Entering the market is another discussion all together.

How to make money in forex?

The key aspect to their trading decisions is derived from the economic fundamentals. The fundamental backdrop of the market consists of three major areas and thatís why itís hard to pin point currency direction sometimes.

When you have the political situation countering the central bank announcements currency direction is somewhat disjointed. But when there are no political issues and formulated central bank policy acting in accordance with the economic data, thatís when we get pure currency direction and the big trends emerge. This is what bank traders wait for.

The fundamental aspect of the market is extremely complex and it can take years to master them. This is a major area we concentrate on during our two day workshop to ensure traders have a complete understanding of each area. If you understand them you are set up for long term success as this is where currency direction comes from.

There is a lot of money to be made from trading the economic data releases. The key to trading the releases is twofold. First, having an excellent understanding of the fundamentals and how the various releases impact the market. Secondly, knowing how to execute the trades with precision and without hesitation. If you can get a control of this aspect of trading and have the confidence to trade the events then youíre truly set up to make huge capital advances. After all it is these economic releases which really direct the currencies. These are the same economic releases that central banks formulate policy around. So by following the releases and trading them you not only know whatís going on with regards central bank policy but youíll also be building your capital at the same time.

Now to be truly successful you need an extremely comprehensive capital management system that not only protects you during periods of uncertainty but also pushes you forward to experience capital expansion. This is your entire business plan so itís important you get this down pat first.

Our stringent capital management system perfectly encompasses your risk to rewards ratios, capital controls as well as our trade plan Ė entry and exits. This way when youíre trading, all your concerned about is finding entry levels. Having such a system in place will also alleviate the stresses of trading and allow you to go about your day without spending endless hours monitoring the market.

I can tell you most traders at banks spend most of the day wandering around the dealing room chatting to other traders or going to lunches with brokers. Rarely are they in front of the computer for more than a few hours. You should be taking the same approach. If you understand the technical and fundamental aspects of the market and have a comprehensive professional capital management system then you can.

From here it just takes a simple understanding of the key strategies to apply and where to apply them and away you go. Trust me you will experience more capital growth then you ever have before if you know how the bank traders trade. Many traders have tried to replicate their methods and Iíve seen numerous books on ďhow to beat the bankersĒ. But the point is you donít want to be beating them but joining them. That way you will be trading with the market not against it.

So to conclude let me say this: There are no miraculous secrets to trading forex. There are no special indicators or robots that can mimic the dynamic forex market. You simply need to understand how the major players (bankers) trade and analyse the market. If you get these aspects right then your well on the way to success.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

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